Adams v. Coates

RODOWSKY, Judge. Following decision by the Court of Special Appeals in an unreported opinion, we issued the writ of certiorari in this case to consider the two following questions: ³ “May a circuit court grant punitive damages in [a] case of an equitable nature that was decided subsequent to the adoption of Maryland Rule 2-301, merging law and equity[;]” and “[If] the equitable nature of the proceedings does not preclude the award of punitive damages, is it incumbent upon your petitioner to prove actual malice in a case involving an intentional breach of a fiduciary relationship between the parties.” The fiduciary relationship referred to is that between partners. The petitioner, David M. Adams (Adams), and the respondent, Robert Jerry Coates (Coates), met in 1958, began living together later that year, and lived together continuously until October of 1984 when Coates left their joint home. Through most of this period Adams, a speech and language pathologist, had been employed by the Board of Education of Frederick County.

He was terminated from that employment in January 1985 during a period of complete emotional collapse resulting from his separation from Coates. Adams received full salary from the Board of Education, however, through 1985. Coates was licensed as a real estate broker in 1970. Personally and on behalf of clients, he has been active in the market for investment properties in the Frederick area.

Beginning in the early 1970s the parties became involved in many business ventures together, the core of which was real estate investment. In 1978 Coates, another broker, and Adams, who then obtained a real estate salesperson’s license, created Fredericktowne Realty Incorporated (FRI), a real estate agency that subsequently grew to ten associate brokers and approximately thirty-five salespersons. By an agreement resting in parol and on conduct, Adams and Coates formed an equal partnership with respect to their mutual investments in realty and in personalty. They owned a number of properties in the Frederick area, including their home on Westwood Drive, a condominium in Washington, D.C., a lot on a lake in Kentucky, and a cottage in Largent, ⁴ West Virginia.

In general, they took title to the real estate in which they invested as joint tenants. They also invested in gold coins, a collection of stickpins, and other personalty. The financial operations of the parties during their relationship were characterized by mutuality. Although Coates had a larger earned income than Adams, the parties pooled in one or moré joint bank accounts their earned income, the investment income from their properties, and the gains on sales of properties.

From these accounts they paid their personal living expenses, which included relatively extensive travel in the United States and in foreign countries, and their business expenses. Accumulated capital was utilized as the down payment to purchase additional properties with mortgage financing. It appears that, for many years prior to an audit by the Internal Revenue Service, Adams and Coates each reported fifty percent of the net income from their investments directly on their individual income tax returns. At the urgings of an IRS agent and utilizing the professional services of an accountant, the parties, beginning with calendar year 1984, filed partnership returns of income and the associated K-l forms.

They called the partnership ADCO Joint Venture (ADCO). Title to the underlying, income-producing assets was not changed to the ADCO name. The bank account that the parties used as an accounting control of their investment income and expenses was known as the ADCO account. When Coates terminated the personal relationship between the parties, he also dissolved their partnership. “ ‘Dissolution’ means the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business.” Md.Code (1975, 1993 Repl.Vol.), § 9-101(e) of the Corporations and Associations Article (CA). 1 From an orderly, legal standpoint, the next phase in the affairs of a dissolved partnership is its ⁵ winding up, but the winding up of the subject partnership seems not to have been orderly or fully completed.

Initially, ADCO accounts had been opened at Fredericktowne Bank & Trust Co. (Fredericktowne). Adams had expected those accounts to require two signatures for withdrawal. Questions raised by Adams with that bank, when he learned that Coates had withdrawn funds on the latter’s signature alone, resulted in a practical freeze on the accounts for some months. In order to be able to manage the properties and allegedly on the advice of Adams’s former attorneys, Coates, in the beginning of 1985, opened a new ADCO account at the Farmers & Mechanics National Bank (F & M) on which only Coates’s signature was required. 2 Thereafter, ADCO funds were deposited to this account, without endorsement by Adams.

Withdrawals from this account by Coates, for personal purposes, form the bulk of the claims asserted by Adams in the issues on appeal. Adams remained in the house on Westwood Drive, and Coates took the position that Adams should pay all of the expenses of carrying the property. Adams did not keep the mortgage current. In January 1986, Coates filed the instant action against Adams.

It was initiated as a complaint for sale, in lieu of partition, of the Westwood property. Adams counterclaimed. When the case came to trial in September 1989 the partition sale had been resolved, and Adams stood on his “Fourth, Supplemental, Revised and Consolidated Counter Complaint,” as amended. Following a court trial, judgment was entered in favor of Adams against Coates on certain counts, trustees were appointed to sell certain property, and the rights of the parties concerning FRI and myriad items of personalty were resolved. ⁶ We are concerned here with the judgment entered on Count II of Adams’s counterclaim in the amount of $10,504.50, together with prejudgment interest of $3,187.80, and with the judgment entered on Count V of that pleading in the amount of $24,782.86, with prejudgment interest of $5,235.18.

The judgment on Count II represents two transactions. One transaction is known to the parties by its promotor’s name, Taylor-Masser. In consideration of several monthly payments of $2,000 each, made from a joint savings-investment account at Fredericktowne, Coates obtained either the right to acquire an equity position in a real estate investment, absent repayment of the advances by the promotor, or Coates acquired an equity position subject to its being reacquired by the promotor upon repayment of the advances with interest. In any event, Taylor-Masser repaid Coates $11,009.04, thereby terminating the Coates equity position.

The circuit court reasoned that Adams was entitled not only to one-half of the original principal investment, but also to half of the interest or profit on the transaction, so that one-half of $11,009.04, i.e., $5,504.50, was included in the judgment on Count II in favor of Adams. 3 In the other transaction Coates withdrew $10,000 from the joint savings-investment account at Fredericktowne and utilized the funds to make a personal investment through an investment banking, firm. 4 The principal amount of the judgment on Count V is precisely the principal amount claimed by Adams in the final amendment to Count V of his counterclaim. It represents interest earned and the return of capital on three separate mortgages owned by the parties, which were paid in full by the mortgagors. These funds were deposited by Coates in the F & M ADCO account, withdrawn by him, and used for his personal purposes. At trial, Coates did not dispute that he had done so. ⁷ ADCO’s federal and state partnership returns of income, ADCO’s K-l forms for Adams and for Coates, and the balance sheets for ADCO for the calendar years 1985 through 1988 were introduced into evidence.

These financial statements and tax returns were prepared by an accountant. They clearly summarize the withdrawals by Coates and Adams. The two partners’ capital accounts are summarized from those exhibits and presented in the appendix that follows this opinion. As of December 31, 1988, Adams’s capital account was approximately $25,000 while Coates was overdrawn by somewhat more than $17,000.

Coates testified that this data periodically was furnished, by mail and hand carried, to Adams, either directly or through his attorney. Adams’s claims for relief had included requests for punitive damages. The circuit court, after awarding the damages described above, initially denied punitive damages. With respect to Count V the court concluded: “I don’t find any malice in the legal sense of the term in actual malice or anything of that matter.

I don’t believe that Mr. Adams has met his burden of proof in that area. If I was convinced ... that punitive damages are available purely for a breach of a fiduciary duty, absent the showing of actual malice, then I would be inclined to award punitive damages.... So, I don’t believe that on a sole proof of a breach of a fiduciary duty ... that punitive damages are available because I don’t find that you have proved malice, meaning actual malice.” With respect to Count II, the Court said: “Again, I don’t find any malice on the part of Mr. Coates, no actual malice.... If a breach of fiduciary duty alone allowed that, punitive damages would also have been considered on count II.” Near the conclusion of the same argument, counsel for Adams suggested that the court had not made any finding on fraud.

The court ruled, “I do make a finding that fraud was ⁸ not committed, but that there was a breach of fiduciary duties.” .Adams filed post-judgment motions and prevailed on the circuit court to defer its ruling on the punitive damages issue raised therein. Under Maryland law at the time of trial, punitive damages could not be awarded on a tort arising out of a contract, unless there was actual malice. This is the Testerman-Wedeman rule. H & R Block, Inc. v. Testerman, 275 Md. 36 , 338 A.2d 48 (1975); Wedeman v. City Chevrolet Co., 278 Md. 524 , 366 A.2d 7 (1976).

In Miller Bldg. Supply v. Rosen, 305 Md. 341 , 503 A.2d 1344 (1986), we had applied the Testerman-Wedeman rule in affirming the disallowance of punitive damages in an action by an employer against outside sales employees who had diverted their employer’s business to their own gain. In the case before us the circuit court initially had concluded that the fiduciary duties arising from the principal and agent relationship involved in Miller Bldg. Supply were analogous to the fiduciary duties between partners, but the circuit court was also aware of the fact that a case involving the Testerman-Wedeman rule was then pending before this Court.

Decision on the post-judgment motions was deferred awaiting our decision. That appeal, Schaefer v. Miller, 322 Md. 297 , 587 A.2d 491 (1991), decided by an evenly divided Court, left the Testerman-Wedeman rule standing, but obviously imperiled. By Order of April 24, 1991, the circuit court, “having ... read and considered” the opinion in Schaefer v. Miller, denied Adams’s motion on the reserved issue and refused to alter the denial of punitive damages. The Testermam-Wedeman rule, with its distinction based upon torts arising out of a contract, was abandoned by this Court on February 14, 1992.

See Owens-Illinois v. Zenobia, 325 Md. 420, 455 , 601 A.2d 633, 650 (1992). Adams appealed to the Court of Special Appeals, contending that he should have been awarded punitive damages on Counts II and V. At oral argument before it, the intermediate appellate court suggested that the action was equitable in ⁹ nature so that punitive damages were not available. 5 In its unreported opinion, the Court of Special Appeals so held. The court pointed out that the gravamen of Adams’s claims was that Coates “had distributed to himself partnership property to which he was not entitled.” Seeley v. Dunlop, 157 Md. 378, 383 , 146 A. 271, 273 (1929), was quoted for the proposition that “ ‘one partner may not sue his copartner at law, unless the cause of action was so distinct from the partnership accounts as not to involve their consideration, or the amount recovered would be wholly the separate property of the plaintiff.’ ” The Court of Special Appeals then held that “[b]ecause this was exclusively an action by one partner against another for misappropriation of partnership assets, it was exclusively an equitable action, and ... punitive damages are not allowed.” For the latter proposition the Court of Special Appeals relied on Judge Hammond’s opinion for this Court, on reargument, in Superior Constr. Co. v. Elmo, 204 Md. 1, 14 , 104 A.2d 581 (1954).

Adams then successfully petitioned this Court for certiorari, raising the two issues that we quoted in the opening of this opinion. I Counts II and V are premised on the fiduciary duty owed between partners. But for including a claim for punitive damages among its requests for relief, Count II pleads a traditional action for an accounting. CA § 9-404(a) provides that “[ejvery partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him ¹⁰ without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property.” Under CA § 9—405(3), “[a]ny partner shall have the right to a formal account as to partnership affairs ... [a]s provided by § 9-404.” Under Maryland practice antedating the 1984 merger of law and equity for pleading and other purposes, an accounting action could be maintained in equity when the remedies at law were inadequate.

Among the scenarios in which legal remedies were considered inadequate was “where a fiduciary relation exists between the parties, and a duty vests upon the