Hogans v. Hogans Agency, Inc. (Ct. of Special Appeals) and more


Hogans v. Hogans Agency, Inc. (Ct. of Special Appeals)

Filed:  August 28, 2015

Holding: A corporation may require a stockholder, who is a direct competitor of the corporation, to sign a confidentiality agreement before inspection of the corporation’s books of accounts and other corporate records.

Facts:  Stockholder (the “Stockholder”) owns 37.5% of stock in an insurance and real estate brokerage company (the “Corporation”).  Stockholder also owns another real estate brokerage company that is a competitor to the Corporation.  The Stockholder asserted that his right to request an inspection of company records falls under Sections 2-512 and 2-513 of the Maryland General Corporation Law (the “MGCL”). Section 2-513 broadens the rights for stockholder's who have had at least 5% of the outstanding stock of a corporation, for at least six months. A stockholder who fits the criteria has the right to inspect the "book of accounts" of the corporation. 

The Corporation responded to the request by providing the Stockholder with copies of the Corporation’s bylaws, minutes of the proceedings of the Corporation’s stockholders, an annual statement of affairs for the prior tax year and the name, address, and shares of each of the Corporation’s stockholders. The Corporation agreed to allow for the onsite inspection and copying of the books of accounts, under the condition that the Stockholder sign a confidentiality agreement, prohibiting the Stockholder from sharing the information with a third party. The Stockholder refused and filed a pro se Complaint for Stockholder’s Right to Inspect requesting: 1) to gain immediate access to a copy of the books of account for inspection; 2) access to the Corporation’s photocopier free of charge; 3) the Corporation to pay for a complete audit of company records and 4) the Corporation to pay the Stockholder’s attorney’s fees and costs.

The trial court granted the Corporation’s motion for summary judgment ordering that a confidentiality agreement must be signed by the Stockholder in order for him to be allowed access to inspect corporate records. 

Analysis:  On appeal, the Stockholder argued the MGCL does not require that a stockholder sign a confidentiality agreement prior to inspection of a corporation’s records and that “possible competition” between a stockholder and a corporation is not sufficient to deny a stockholder his right of inspection.  The Court noted that the right of a stockholder to inspect the corporate records of a corporation is provided for under Sections 2-512 and 2-513 of the MGCL, which delineates the differences between the rights of any stockholder versus that of a stockholder who has owned more than 5% for six months.

The Court pointed to two case holdings regarding stockholder access to corporate records, that were reconciled through a treatise authored by James J. Hanks Jr.  In Weihmayer vs Bitner, 88 Md. 325 (1898), it was determined that a stockholder was entitled to an absolute right to inspect corporate records, that can be refused only through a finding that the intended use was “evil, improper of unlawful.”  In Wright v. Hebin, 111 Md. 644 (1910) the court decided it would allow for the refusal of access, if the court issued a writ of mandamus, where it decided what the proper safeguards to protect the interests of all concerned would be. Stockholders could gain access to information for “legitimate purposes.” 

Hanks agreed that a five-percent, six-month stockholder was entitled to inspect the books, for the purpose of protecting his equity investment, “but not for any other purpose, such as competing with the corporation.”  Hanks goes on to state that a corporation may take reasonable measures, such as conditioning the right to inspect corporate records upon the stockholder signing a confidentiality agreement, “to protect the corporation against disclosure and misuse of confidential documents and information.”


The Court relied upon this explanation of the rights of a stockholder to inspect, and agreed with the trial court’s “exercise of sound discretion” in requiring the Stockholder to sign a confidentiality agreement prohibiting him from sharing information with third parties.  The condition of allowing access, after a confidentiality agreement was signed, was found to be a reasonable means to prevent the Stockholder from using the inspection rights to gain information that could be used to advance his own competing business.

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.

     


Len Stoler, Inc. v. Wisner (Ct. of Special Appeals)

Filed:  May 28, 2015

Opinion by Hotten, J.

Holding:  An automobile dealer may charge and retain an electronic titling fee and not violate the Credit Grantor Closed End Credit provisions of the Commercial Law Article.

Facts:  Appellee alleged an automobile dealer violated the Maryland Closed End Credit Grantor Law (the “CLEC”) of Sections 12-1001 et. seq. of the Commercial Law Article, which “governs closed end credit transactions and regulates interest rates, charges, default and other aspects of a credit transaction,” when it collected an electronic titling fee.  The dealer argued that Section 13-601 of the Transportation Article permits an automobile dealer to collect the electronic titling fee upon issuing permanent registration plates.  The Court found the provisions of the Commercial Law Article and the Transportation Article to be in conflict with one another.  

Analysis:  The Court discussed several principles of statutory construction when the plain language of statutes renders a conflict, including (i) an analysis of the context and legislative history of both statutes, (ii) the precedence of a more recent statute over an earlier statute and (iii) the well-established principle that a more specific enactment governs a more general statute.  

The Court reviewed a prior case interpreting the CLEC and the General Assembly’s response to the case, concluding that the General Assembly’s goal was to “create certainty in credit contracts” and allow a credit grantor to opt into one particular credit transaction statute while still allowing other Maryland laws and regulations to apply.  The Court found the Transportation Article to contain more specific language because it specifically refers to the fee associated with electronic registration while the CLEC refers to “reasonable” fees.  Further, the electronic titling fee provision of the Transportation Article was enacted a decade after the CLEC.   

The Court found the electronic titling fee to be an exception to CLEC and noted the consistency of this finding with prior interpretations of the Attorney General’s office. 

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.

     

Dynport Vaccine Co. LLC v. Lonza Biologics, Inc. (Maryland U.S.D.C.)


Filed: April 30, 2015

Opinion by: James K. Bredar

Holding: A basic ordering agreement that provides a framework for future contracts but fails to include mutuality of obligation is not by itself an enforceable contract.

Facts: Contractor and subcontractor entered into a basic ordering agreement, wherein defendant “agreed to provide certain services, pursuant to task orders.” Plaintiff issued various task orders, including three specific task orders mentioned in the complaint. Plaintiff brought suit alleging it incurred significant costs because of defendant’s refusal to perform and its breach of the basic ordering agreement.

Defendant argued the basic ordering agreement was not an enforceable contract and, therefore, the claim of breach of contract failed to state a claim for relief. Defendant conceded that the task orders were binding and legally enforceable contracts, but noted that plaintiff did not rely on breach of the task orders for its breach of contract claims.

Analysis: The “meager case law available” provides that a basic ordering agreement “is not an enforceable contract, despite its use of terms typically used in the language of contracts.” The court likened a basic ordering agreement, which only provides the framework for future contracts, to an agreement to agree because “contractual obligations will arise only after an order is placed.” Under such an agreement “no obligations are assumed by either party until orders are given by the [plaintiff] and accepted by the [defendant].”

The court reviewed the language of the basic ordering agreement in question, concluded it lacked mutuality of obligation and found it to be unenforceable. However, as both parties agreed the task orders were enforceable contracts, the court redefined plaintiff’s count as claiming breach of contract as to those task orders.

The full opinion is available in PDF.

     

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