Bontempo v. Lare (Md. Ct. Spec. App.)

Filed: April 30, 2014

Opinion by: Douglas R. M. Zanarian

Holding:

(1) When a minority stockholder petitions a court for dissolution pursuant to Md. Code Ann., Corps. & Ass’ns § 3-413 (the “dissolution statute”), such stockholder’s rights will be informed by any existing stockholder agreement and, where there is no evidence of a deadlock of the board of directors or that the company is likely to become insolvent, the court has discretion under the statute to order alternatives to the extraordinary remedy of dissolution.

(2) The dissolution statute does not provide for personal liability, even if fraud is proven.

(3) The proper remedy when a court finds an officer or director has breached his or her fiduciary duties to the company by diverting money from the company for personal use is an order directing such officer or director to repay such money to the company, not an order requiring the company to declare equivalent distributions for all stockholders.

(4) An award of attorneys’ fees and expenses is only appropriate if the injured company has recovered a common fund.

(5) It is the trial court’s role to determine a party’s credibility and whether evidence is sufficient to support the existence of an oral contract.

Facts: Plaintiff became a minority stockholder of Quotient, Inc. (“Quotient”), a close corporation organized under Maryland law, in 2001. Plaintiff executed a shareholder agreement with the other stockholders of Quotient – the defendants, the Lares (a husband and wife collectively owning 55% of the stock in Quotient). In addition to being a director and officer of Quotient, Plaintiff was also an employee pursuant to an oral agreement with Mr. Lare, which Plaintiff alleged included that he would receive a salary equal to that of the Lares combined. In addition to certain “perks” (e.g., company credit cards for gas, meals and entertainment and a corporate fitness trainer), paid for by Quotient and received by Plaintiff and the Lares, the Lares began paying household employees from Quotient’s payroll account in 2006, advanced interest-free loans from Quotient to two companies in which the Lares had an interest and took a loan from Quotient for renovations to the Lares’ personal home. The relationship between Plaintiff and the Lares began to sour and in 2010 Mr. Lare terminated Plaintiff’s employment with Quotient after Plaintiff refused to voluntarily resign and sell his shares in Quotient. Plaintiff remained an officer and director of Quotient for six months after termination, however, and continued to receive distributions as a stockholder. Plaintiff filed suit against the Lares seeking relief pursuant to Maryland’s dissolution statute and asserted derivate claims on behalf of Quotient for imposition of a constructive trust, breach of fiduciary duty, and constructive fraud and a direct claim for breach of contract.

The trial court ruled in favor of Plaintiff as to his petition for dissolution; however, the trial court refused to dissolve Quotient and instead ordered Quotient to pay Plaintiff $167,638 in damages. The trial court also ruled in favor of Plaintiff as to his claim for breach of fiduciary duty and ordered that the misappropriated funds be treated as a distribution from Quotient and ordered Quotient to pay Plaintiff a proportionate amount, including attorney’s fees, but ruled in favor of the Lares as to Plaintiff’s claim for constructive fraud. The trial court ruled in favor of Plaintiff as to his claim for breach of contract and ordered Quotient to pay Plaintiff $81,818.18 in unpaid distributions, but refused to find an oral equal-compensation contract existed. Both parties appealed.

Analysis: The Court affirmed the holding of the trial court, including the trial court’s refusal to dissolve Quotient; however, it found that the trial court erred in how it allocated the damages.

Although the Court upheld the trial court’s finding, not contested on appeal, that Mr. Lare’s behavior met the standard for oppressive conduct, particularly his threat and ultimate firing of Plaintiff for refusing to voluntarily resign and sell his shares in Quotient, the Court also upheld the trial court’s conclusion that dissolution was not the only available remedy. The Court noted that it was Plaintiff’s status as a stockholder of Quotient, as defined by the shareholder agreement, that defined and bound the rights he was entitled to vindicate under the dissolution statute and the appropriate remedies. Unlike in Edenbaum v. Shcwarcz-Osztreicherne, 165 Md. App. 233 (2005), the Court noted that the shareholder agreement did not mention Plaintiff’s employment rights, thus the shareholder agreement did not give Plaintiff a reasonable expectation of employment or provide an enforceable to such. Instead, the Court found that Plaintiff was entitled to participate in distributions and the affairs and decisions of Quotient consistent with his status as a stockholder. Although Mr. Lare’s actions frustrated such rights, Plaintiff had resigned from Quotient’s board of directors and thus there was no evidence of a deadlock justifying dissolution, nor was there any evidence to suggest that, despite the use by the Lares of Quotient’s funds for personal expenses, Quotient was likely to become insolvent. Therefore, the extreme remedy of dissolution was inappropriate.

The Court also held that the Lares could not be personally liable under the dissolution statute, even if their actions constituted fraud, because the purpose of that statute is to vindicate the reasonable expectations of minority stockholders, in such capacity, against oppression by majority stockholders. Plaintiff’s injury as a minority stockholder was lost distributions, and thus, Plaintiff was made whole by accounting to determine how much money the Lares diverted from Quotient and an order to pay distributions to Quotient stockholders based on the amounts diverted.

The Court also agreed that the Lares had breached their fiduciary duties as directors and officers of Quotient by diverting money from Quotient for personal use; however, the Court held that the trial court erred in ordering a distribution to all stockholders as a remedy. The Court noted that it was Quotient, not Plaintiff, who was harmed because it was Quotient’s money that was taken by the Lares and, thus, distributions would not make Quotient whole but would instead take more money from Quotient. The Court held that the appropriate remedy would have been ordering the Lares to repay Quotient for the money taken. Because such payment would result in a recovery by Quotient of a common fund, the Court noted that an award by the trial court on remand of attorneys’ fees and expenses would be appropriate under the common fund doctrine.

Despite holding that the Lares had breached their fiduciary duties to Quotient, the Court affirmed the trial court’s ruling in favor of the Lares as to Plaintiff’s claim for constructive fraud. Although constructive fraud usually arises from a breach of fiduciary duty, the Court noted that they are not equivalent and that “a director can breach fiduciary duties without committing fraud.” The Court found that, although the Lares had used bad judgment in using funds from Quotient for their personal expenses, they had not engaged in a long course of illegal or fraudulent conduct, especially since all of the transactions were recorded on the books of Quotient and Plaintiff had access to such books. For the same reason, the Court found that the Lares did not act with malice.

Finally, the Court found that the trial court committed no error in refusing to find that an oral equal-compensation contract existed between Plaintiff and Quotient. Although Plaintiff and his wife testified to the oral equal-compensation agreement and evidence showed that Plaintiff was paid a salary equal to the Lares for four years, there was also evidence that, for multiple years in the beginning and towards the end of his employment, the salaries of Plaintiff and the Lares differed significantly. The Court noted that it was the trial court that heard the evidence and it was not for the Court to determine on appeal whether the trial court gave appropriate weight to the parties’ credibility.

The full opinion is available in PDF.

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

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

Held:

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

Facts:

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

Analysis:

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

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

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

The full opinion is available in PDF.

Uduak J. Ubom v. SunTrust Bank (Ct. of Special Appeals)

Filed: April 4, 2011
Opinion by Judge Kathryn Grill Graeff

Held: The clear language of an Agreement for a Line of Credit, as a whole, shows that the signature of a managing partner as guarantor was in a personal capacity, resulting in personal liability when the LLC defaulted on its obligations.

Facts: A professional limited liability company that provides legal services obtained a line of credit from a bank. The Managing Partner, the managing attorney and sole owner of the LLC, signed his name twice on the Agreement, once on the signature line for “Applicant” and once on the signature line for “Guarantor.” After both signatures, The Managing Partner included his title of “Managing Partner.” The Managing Partner also completed the personal information listed under the section title “Guarantor Information.” The Bank approved the line of credit.

Almost three years later, the bank filed a Complaint against the LLC and The Managing Partner asserting that the LLC had failed to make scheduled monthly payments due on the account, and requesting that the court grant judgment in its favor against the LLC and The Managing Partner, jointly and severally. The Managing Partner acknowledged that the LLC had defaulted on the Agreement, but argued that he signed the Agreement in his official capacity as Managing Partner, not as a personal guarantor of the loan. The Managing Partner further asserted that the bank representative told him that although he was signing as guarantor on the LLC’s Line of Credit, he could avoid personal liability by not including his name on the page of the Agreement that asked for legal name of guarantor, and by writing his title of “Managing Partner” after his signature on the final page of the Agreement.

The Circuit court granted summary judgment in favor of the bank and against the LLC and The Managing Partner. The Managing Partner appealed.

Analysis: The legal question before the court was whether The Managing Partner signed his name in his capacity as an officer of the corporation or whether it was a personal guaranty. The Court noted that The Managing Partner in arguing that his signature did not create a personal guaranty cited no case law in support of this assertion. However, the Court exercised its discretion to consider The Managing Partner’s claim. The Managing Partner argued that the court should have allowed him to introduce evidence of the statements allegedly made to him by SunTrust’s representative.

Maryland courts adhere to a principle of objective interpretation of contracts, and only when the language of the contract is ambiguous will the court look to extraneous sources for the contract’s meaning. The Court compared the contract in this case to a similar case, L & H Enterprises, Inc. v. Allied Building Prod. Corp, 88 Md. App. 642, where there was a question of whether a guaranty of a corporation’s obligation, signed by a corporate officer, was signed in the officer’s representative or individual capacity. Although the Court in that instance found there was no personal liability because there was intent to only bind the corporation and only one place the corporation’s representatives signed, the Court distinguished that case from the case at hand. Here, there were two signature lines, one for “Applicant,” the law firm, and one for “Guarantor.” The Managing Partner signed his name on both signature lines, including his title after his signature. The court asserted that a corporate officer is not relieved of personal liability by the mere addition of his corporate title to a signature line.

The Managing Partner also completed the personal information under the “Guarantor Information” section of the form. If The Managing Partner had only signed the guaranty in a representative capacity, this would render the guaranty inconsequential; it would add nothing to SunTrust’s security to have the law firm, through its Managing Partner, guaranty an obligation to which the law firm was already bound. The language of the Agreement specifically indentifies the applicant, the LLC, as the entity primarily responsible for the line of credit, and the individual signing as guarantor, as jointly liable for the obligation of the LLC.

Since the language, which is clear and unambiguous, of the Agreement as a whole shows an intent to fix personal liability, parol evidence is inadmissible to contradict the clear terms of the Agreement.

The Court held that the circuit court properly granted bank’s motion for summary judgment against the LLC and the Managing Partner.

The full opinion is available in pdf.