Costa Brava Partnership III, L.P. v. Telos Corp., (Cir. Ct. for Baltimore City)

Issued April 19, 2007--Order and Opinion by Judge Albert J. Mattricciani, Jr.

An earlier opinion in this case was issued on November 29, 2006. It is synopsized here. In that earlier opinion, the Court denied the plaintiffs' motion for the appointment of a receiver.

Here, the plaintiffs had asked asked the Court to enjoin defendants and their agents from pursuing or closing any sale of the corporation's assets outside the ordinary course of business until May 31, 2007, when two new Class D directors will be elected to the corporation's board. Defendants countered that plaintiffs' request for a preliminary injunction sought extraordinary relief to which they were not entitled under Maryland corporation law or the facts of this case.

The Court adopted the defendants' position that the request was one for a preliminary injunction. It denied the request because it concluded that the plaintiffs were unable to establish that they had a likelihood of succeeding on the merits of their claim. Specifically, the Court concluded that "at this point [in time]" the plaintiffs are unable to persuade it that the current directors lack the requisite independence to consider a sale of the corporation's assets.

The order, together with supporting opinion, is available in PDF.

Argiropoulos v. Kopp, et al. (Maryland U.S.D.C.)(Not approved for publication)

Decided March 26, 2007—opinion by Judge Catherine Blake

Plaintiff John Argiropoulos claimed damages on his own behalf, and on behalf of Club 10, Inc. in an action against defendants whom Argiropoulos claimed breached contracts, made fraudulent representations, breached the duty of loyalty owed to Club 10's shareholders, and were grossly negligent in the management of the club. The Court considered and granted a motion by Defendants to dismiss multiple counts of the complaint. Counts Seven through Thirteen alleged that the defendants engaged in waste, illegitimately took cash from the corporation, violated tax laws, permitted illegal activities on Club 10 premises, discriminated against customers, and generally mismanaged the corporation. The Court found that the claims alleged injuries to the corporation and would be typically appropriately brought under a derivative action. Because a suit to recover damages to a corporation can only be brought by corporation itself through a derivative action, and not by individual shareholders, the Court dismissed those counts.

In counts Fourteen through Twenty, Argiropoulos made a series of claims on behalf of the corporation in the form of a shareholder derivative action. The defendants argued that Argiropoulos did not fairly and adequately represent the interests of the shareholders or members similarly situated as required to maintain such a derivative action. Both the individual claims by Argiropoulos and his derivative claims sought significant money damages and hence, the Court reasoned, Argiropoulos and the derivative class were competing for the same pool of money, creating a conflict. The Court dismissed counts Fourteen through Twenty on the ground that Argiropoulos was not an adequate representative of the derivative class.


The opinion and order are available in PDF.

Bender v. Schwartz (Ct. of Special Appeals)

Filed March 1, 2007--Opinion by Judge James R. Eyler.

This is an appeal from an order dismissing a shareholder derivative action. The action stems from a dispute between various family members who are shareholders in two corporations. One of the corporations is a Maryland corporation and the other is a Delaware corporation. The issues were tried on a documentary record and the circuit court's decision was made pursuant to Maryland Rule 2-502.

Each of the corporations in question had formed "Demand Committees" --special committees to investigate allegations made by the plaintiffs in their demand letter and in the first amended complaint filed in the action.

Held:

1. The conclusions reached by the Demand Committees must be evaluated to determine whether the their were reasonable and whether the Committees had reasonable bases for their conclusions, i.e., within the ambit of the business judgment rule. The burden to rebut the presumption that they acted in the best interests of the corporations is on the plaintiffs.

2. To require investigation by the Demand Committees, the plaintiff's claims must have been "articulated in the demand." Each claim must be articulated specifically enough to give directors a fair opportunity to initiate the action requested by appellants. With respect to the claims made by the plaintiffs, the plaintiffs did not provide sufficient allegations in their demand letter or first amended complaint to alert the Demand Committees to the existence of the claims.

3. The plaintiffs failed to rebut the presumption that the Demand Committees' investigations were reasonable and the conclusions of those Committees within the realm of sound business judgment.

4. Certain claims made by the plaintiffs were not properly brought via a derivative action, but, rather, were individual claims.

5. The Court upheld the rejection of other claims on the basis that the claims were not articulated specifically enough to give the directors a fair opportunity to initiate the action requested by the plaintiffs.

6. The plaintiffs had also made individual claims claim that the appellees (1) had a fiduciary duty to offer all stockholders the opportunity to participate in various ventures outside the corporation and (2) had a fiduciary duty to inform them of the availability of contiguous land. The Court concluded that these claims are outside the duties of majority shareholders and directors to minority shareholders and upheld the lower court's dismissal of the claims.

This is a lengthy opinion that is heavily fact-specific.

A copy of the opinion is available in PDF.

Gordon Grocery, Inc. v. Associated Wholesalers, Inc. (Maryland U.S.D.C.) (Approved for Publication)

Signed February 28, 2007--Memorandum opinion by Judge Andre M. Davis. (Approved for publication.)

Held: Dispute over stock redemption procedures remanded back to state court on the basis of mootness.

Plaintiff Gordon Grocery, Inc. ("Gordon Grocery") is a shareholder in defendant Associated Wholesalers, Inc. ("Associated"), which is a Pennsylvania corporation operating as a cooperative engaged in the business of purchasing, manufacturing, processing, warehousing and distributing food and related merchandise for retail merchant shareholders such as plaintiff. In the fall of 2005, Associated notified Gordon Grocery that it had failed to satisfy the minimum purchase requirements of the cooperative, and that Associated would redeem Gordon Grocery's shares, thereby terminating their relationship. Associated proposed to do so in two installments, one-third initially, and two thirds in 2010, while Gordon Grocery asserted the right to immediate redemption, and filed in state court for a declaratory judgment to that effect. Associated had the case removed to federal court.

During discovery, Associated elected to rescind the redemption determination and retain Gordon Grocery as a shareholder, thus rendering the dispute over redemption procedures abstract, and moved for summary judgment on the ground of mootness. The judge agreed, but rather than rendering the requested "judgment" in favor of Associated, remanded the case to state court from which it had been removed, where the judge speculated (but declined to decide) that the state trial court might determine it lacks subject matter jurisdiction on the ground of mootness.

The memorandum opinion is available in PDF.

Storetrax.com, Inc. v. Gurland (Ct. of Special Appeals)

Filed February 6, 2007--Opinion by Judge Glenn T. Harrell, Jr.

This case considers whether a member of a corporation's board of directors breached his fiduciary duty owed to the corporation when he, removed as an employee of the corporation, filed suit against the corporation in order to enforce severance pay provisions of his employment agreement, pursued summary judgment b y default after the corporation failed to file a timely answer, and sought to enforce his money judgment, over the corporation's opposition, by attaching the bank account of the corporation . The Circuit Court for Montgomery County held that the board member did not breach his fiduciary duty. The Court of Special Appeals affirmed.

Gurland was a member of the board of directors an d an officer of Storetrax.com, Inc. After the termination of Gurland's employment as an officer, and a letter from Gurland to the board of directors indicating that a lawsuit would be filed if the matter of severance pay was not resolved before a date certain, Gurland filed suit seeking severance payment under the terms of an employment agreement. Through no fault of either party, the summons, complaint, and accompanying motion for summary judgment was not delivered timely to the corporation by its resident agent. When the corporation did not respond to the complaint or motion, summary judgment by default was entered against the corporation. Ten days later, Gurland enforced the judgment entered in his favor by filing a petition for writ of attachment.

In its extensive summary of the opinion, the Court stated:

It is well-settled that directors of a corporation owe a fiduciary duty to the corporation and its stockholders. This fiduciary relationship generally obligates directors of a corporation to act in the general interest of the corporation, and not for their individual benefit. Situations may arise, however, where a corporate director, despite the requirement that a director adhere strictly to his or her fiduciary obligations, may proceed with an individual plan of action even though the director's interests conflict directly with those of the corporation. When such a situation arises, a director may find "safe harbor" by disclosing to the corporation the conflict of interest and pertinent facts surrounding the conflict so that a majority of the remaining disinterested shareholders or directors may take action to protect the corporation's financial interests.

Under the circumstances of the present case, Gurland notified sufficiently Storetrax of the imminence of the filing of a lawsuit such that he may claim the protections of the "safe harbor" annunciated above. Respondent delivered to Storetrax on 11 December a letter outlining in detail his claimed entitlement to severance benefits under the termination provisions of the employment agreement. In this letter, Gurland stated specifically that "[i]f the issue remain[ed] unresolved as of [21 December 2001]," he would instruct his attorney to file suit in order to enforce the severance provisions of the employment agreement. This 11 December letter indicated unambiguously that litigation was imminent, and set a clear deadline for which action on the part of Storetrax's board of directors was required to avert suit. Storetrax engaged counsel, responded by letter to Gurland's claims, and otherwise braced for litigation as a result of the 11 December 2001 letter. There is no evidence in the record that Gurland knew that Storetrax had no actual knowledge of the lawsuit at the time he pressed for summary judgment. Nor is there any evidence that Gurland implemented insider information in pursuing his claims, or used his position as director to his advantage. To the contrary, every action taken by Gurland was entirely according to the applicable the Maryland Rules.

There are no general rules of law grounded on a director's fiduciary relationship with a corporation forbidding the director from becoming a creditor of that corporation, or otherwise enforcing his or her claims against it. As a creditor, he or she ought to have the same rights to enforce that claim as any other creditor. As such, Gurland acted within his rights when he filed a petition for writ of attachment at the earliest permitted opportunity after entry of summary judgment by default.

Nor was it a continuing breach of Gurland's fiduciary duties for him to refuse to relinquish voluntarily the garnishment in opposing the corporation's efforts to set aside the judgment. The mere fact that Gurland was a director of the corporation does not impose upon him a legal duty to acquiesce to the demands of the corporation which are adverse to his individual financial interests.

In addition, in what it termed "A Nod to Choice of Law Principles," the Court acknowledged that the lower court incorrectly applied Maryland, rather than Delaware, principles of law. However, the Court concluded that the outcome of the case would have been the same since there was no difference between Maryland and Delaware law with respect to the issues of fiduciary duty involved.

The opinion is available in PDF.

Costa Brava Partnership III, L.P. v. Telos Corp. (Cir. Ct. Balto. City)

Filed November 29, 2006--Opinion by Judge Albert J. Matricciani, Jr.

Motion for the appointment of a receiver. Plaintiffs sought this relief due to the recent resignations of six of the seven independent directors of Telos and the failure of efforts to restructure Telos in order to satisfy the obligations allegedly owed to plaintiffs by virtue of their ownership of certain publicly traded securities.

The Court denied relief holding that the plaintiffs failed to show specific evidence of fraud, oppression or illegal conduct to permit the Court to appoint a receiver. The Court rejected consideration of the alternative equitable remedy suggested by the plaintiffs based upon a change in outside directors or a management dispute over strategic plans.

The full opinion is available in PDF.