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Employment-Related Damages for Oppressed Minority Shareholder Are Unlikely Unless Oppressive Conduct Involved a Breach of Employment Agreement

Bontempo v. Lare
No. 55 (August 6, 2015) Maryland Court of Appeals
by Colleen K. O’Brien, Associate
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://www.mdcourts.gov/opinions/coa/2015/55a14.pdf   

Bontempo v. Lare, Maryland Court of Appeals No. 55 (Aug. 6, 2015), involved an oppressed minority shareholder of a closely held corporation asking the court to dissolve the corporation and award employment-related relief to him. On appeal, the issue was the limitations of the corporate dissolution remedy when the minority shareholder, who was also an employee, sought employment-related damages under the Maryland corporate dissolution statute.

At the trial court level, Plaintiff, a minority shareholder and former employee of the corporation, proved that he had been oppressed by Defendant, Mr. Lare, whose shares together with those owned by his wife, Defendant, Mrs. Lare, were the majority interest in the corporation. While the trial court ordered an accounting, and awarded Plaintiff damages, unpaid corporate distributions, and attorneys’ fees, it declined to dissolve the corporation; to require the corporation to reinstate Plaintiff as an employee; or, to award other employment-related relief. In addition, the trial court determined that Mr. Lare’s actions did not constitute fraudulent conduct meriting punitive damages.

By way of background, in 1999, the Lare Defendants founded the corporation which specialized in information technology professional recruitment. Plaintiff joined the company as Vice-President of Business Development, and as a 45% shareholder in 2000. He did not have a written employment agreement. The Lare Defendants owned the other 55% of the shares. The trial court found that the parties had entered into a “handshake deal” under which Plaintiff would join the company, but without an employment agreement contract that set out any particulars of his employment. Plaintiff argued that there was an understanding that his salary would match the combined salaries of the Lare Defendants, but the trial court determined that there was no meeting of the minds as to this arrangement.

The parties’ relationship deteriorated. Mr. Lare cut Plaintiff’s salary in 2009. At the same time, Plaintiff was concerned that the Lares were taking distributions as shareholders without notifying him or providing him with proportionate distributions. By the fall of 2009, the relationship had soured, and there were disagreements about hiring, business strategy, salaries, shareholder distributions, Plaintiff’s job performance, and Mr. Lare’s corporate financial management. The parties attempted to negotiate a separation whereby Plaintiff would sell his company shares. Plaintiff would not agree to Mr. Lare’s terms, and Mr. Lare fired Plaintiff. The court found that Plaintiff was not fired “for cause.”

Plaintiff advanced a five (5) count Complaint against Defendants, including two (2) counts asserting direct claims against the Lare Defendants and the corporation, respectively, and three (3) counts asserting derivative claims on behalf of the corporation against the Lare Defendants. In terms of the direct claims, Count One was a direct claim against the Lares seeking equitable relief to Plaintiff based on his status as a shareholder of the corporation and the alleged “illegal, fraudulent, and oppressive” conduct of the Lares with respect to him. Count Five was a direct claim against the corporation for breach of contract and sought compensatory damages for Plaintiff related to unpaid salary and distributions based on his status as an employee and shareholder. Three (3) derivative claims sought various types of relief against the Lare Defendants based on alleged breaches of fiduciary duties owed to the corporation and the diversion of corporate funds for their personal purposes. Count Two asked the Court to impose a constructive trust on the Lares for the benefit of the corporation with respect to funds improperly diverted from the corporation. Count Three asked the court to award compensatory and punitive damages against the Lares in favor of the corporation for the alleged breaches of fiduciary duty to the corporation and diversions of corporate funds. Count Four, labeled constructive fraud, alleged the Lares had acted with “fraud, actual malice, and an intent to injure” the corporation and sought compensatory and punitive damages on behalf of the corporation. Prior to trial, the court granted summary judgment to the Lare Defendants individually with respect to Plaintiff’s employment-related damages in Count One.

The remaining claims proceeded to trial. Following a nine (9) day bench trial, the trial court rendered its verdict. With respect to Plaintiff’s direct claim, the court looked to the “reasonable expectations” test to assess whether Plaintiff, in his status as a minority shareholder, had been oppressed with respect to his investment in the corporation. A minority shareholder who reasonably expects that ownership in the corporation would entitle him to a job, a share of the corporate earnings, and a place in corporate management, is oppressed when the majority seeks to defeat those expectations and there exists no effective means of salvaging the investment. Under that standard, to the Court, Plaintiff’s reasonable expectations were that this start-up company would employ him, that he would participate as a stockholder in the company’s profit distributions and that he would not be terminated for subjective reasons.

The trial court found that Mr. Lare oppressed Plaintiff by firing him for refusing to sell his shares, but the Court found that the conduct did not involve fraud or illegality that warranted a corporate dissolution. Although there was oppression, the trial court declined to dissolve the corporation, as there were less drastic, equitable, remedies available. The court also concluded that reinstatement of Plaintiff as an employee was not viable. To the court, the more appropriate remedy for Mr. Lare’s oppressive conduct was to order an accounting of the Lares’ personal use of corporate funds unrelated to the corporation’s business purposes and reimbursement of a portion of Plaintiff’s legal fees and expenses. The Court did not find fraud and it denied any request for punitive damages under that count.

With respect to the derivative claims on behalf of the corporation, the trial court declined to impose the constructive trust sought in Count Two, as it was unable to ascertain the amount misappropriated by the Lares until the completion of the accounting from Count One. With respect to Count Three, the Court entered judgment in favor of the corporation on the breach of fiduciary duty claim as to the Lares, but found that the damages would be the same as those it awarded with respect to Count One. With respect to Count Four, the Court found that Plaintiff failed to meet the burden of proving that Mr. Lare’s actions were fraudulent—as opposed to the product of mismanagement or poor judgment—and accordingly declined to award compensatory or punitive damages on that count. With respect to the direct claim in Count Five against the corporation for breach of contract, the court held that Plaintiff had not met his burden of showing that there was an agreement that his salary would equal the combined salaries of the Lares and declined to award salary-related damages to him. The Court did find, however, that Plaintiff was entitled to $118,000 in unpaid distributions from the corporation, and ruled that he was entitled to a proportionate share of future distributions as a shareholder.

In post-trial motions, the court explained that Plaintiff’s “reasonable expectations” when he joined the corporation were “with the knowledge that he was a minority stockholder and an at-will employee” with no expectation of “lifetime employment with the company.” It thus rejected any additional employment-related relief. The Court also clarified that the accounting required from the Lares related to the corporation paying for the Lares’ household employees and personal litigation expenses. The amount determined was to be regarded as a distribution to the Lares, and Plaintiff was to receive a proportionate distribution from the corporation. The Court also vacated its prior attorney and expert witness fee award in favor of Plaintiff because it had not yet held a hearing on those awards. After holding a hearing, the court awarded attorneys’ fees and costs in favor of Plaintiff against the corporation of approximately $100,000, on Plaintiff’s successful derivative claim (Count Three) under the “common fund doctrine” which allows a court to award attorneys’ fees from a fund recovered as part of a successful derivative action. The accounting also resulted in approximately $81,000 in unpaid distributions being made to Plaintiff.

Plaintiff appealed and Defendants cross-appealed. The intermediate appellate court affirmed all but one of the trial court’s rulings challenged on appeal. The disputed ruling was the trial court’s order that the corporation treat the Lares’ personal use of company money as a distribution, and make a proportionate distribution to Plaintiff. The Court held that, because the corporation was the injured party with respect to the Lares’ misuse of corporate funds, that the monetary remedy should make the corporation whole, and once it was whole, it would be up to the company to decide whether to make a distribution to its shareholders. Accordingly, the Court vacated that part of the award and remanded it for further proceedings. The Court also noted that repayment to the corporation by the Lares of the misappropriated corporate funds would result in a common fund belonging to the corporation, and remanded the issue to the trial court to reconsider the award of attorneys’ fees in light of the common fund that would be recovered.

At the next appellate level, there were two (2) issues considered by the Maryland Court of Appeals: 1) whether the trial court erred in declining to order employment-related relief to Plaintiff, e.g., that Plaintiff be re-employed by the corporation and be awarded back pay and a salary into the future as part of the relief for the oppressive conduct it had found by one (1) of the controlling shareholders of the corporation; and 2) whether the trial court erred when it determined that the Lare Defendants had not engaged in “fraudulent” conduct.

The appellate court held that the trial court did not abuse its discretion in deciding the appropriate relief and affirmed the trial court’s decision. In terms of the measuring stick for “oppression” of a minority shareholder—the shareholder’s “reasonable expectations” upon becoming an owner of the company—did not dictate the nature of equitable relief (short of corporate dissolution) that a trial court must impose. In fashioning relief, the trial court may properly take account of the viability of the corporation, and the impact of the relief on others associated with the corporation, including other shareholders, management, employees, and customers. The Court agreed with the lower courts that the “reasonable expectations” doctrine is the test for oppressive conduct and that dissolution is not the only remedy for oppression. Second, employment-related relief, such as pay-related monetary damages, or a requirement that the corporation employ the minority shareholder, is unlikely to be appropriate in the absence of a written or oral employment agreement, as a remedy for the oppression against the Plaintiff. The trial court acted in its discretion to fashion a lesser remedy than dissolution, and to deny employment-related relief without an oral or written agreement to support that relief. To hold that the court abused its discretion in declining to award employment-related relief—whether the reinstatement or the monetary damages Plaintiff sought—would be to convert a discretionary equitable remedy into a substantive legal right. The Court of Appeals further affirmed the trial court’s finding as to a lack of fraud by Mr. Lare, and accordingly, there was no predicate to award punitive damages.

Overall, the Court determined that the trial court “ably” handled a complex case, and on review of the particular issues before the Court—the finding of oppression but not of fraud, the equitable remedies selected, and the decision not to award employment-related relief or punitive damages—the trial court did not err.

The two (2) dissenters from the Court of Appeals opined that the trial court erred in failing to exercise its discretion in fashioning available equitable relief to remedy the oppression by the majority shareholders and erred in deducing that there was “no legal basis” for Plaintiff’s claim that he was entitled to employment-based damages. The trial court also limited relief to a money judgment for past defalcations of a 55% shareholder, plus attorneys’ fees, without considering how to provide protection to Plaintiff going forward. Plaintiff requested various equitable remedies that would offer him protection against Defendants’ continuing to funnel corporate earnings to their personal benefit. The dissenters would vacate and remand to the trial court for consideration of equitable remedies, including damages for lost employment.