Colandrea v. Colandrea

Couch, J., delivered the opinion of the Court. On August 21, 1967 Dominic J. Colandrea and Carmen J. Colandrea, husband and wife, incorporated Cortland Realty, Ltd. The corporation’s business of real estate sales and property management prospered until Mr. and Mrs. Colandrea encountered marital difficulties. On September 22, 1972 the Colandreas severed both marital and business ties; on that day a separation and property settlement agreement and a stock redemption agreement* 1 were executed. Enforcement of the stock redemption agreement is the subject of this appeal and cross-appeal.

By its terms Mr. Colandrea agreed to sell to Cortland Realty, Ltd. all of his ⁴²³ capital stock in the corporation, numbering fifteen shares, for $100,000. Cortland Realty, Ltd. met its obligation to the extent of $29,000 by making a down payment of $26,060, which was collected at settlement, and by a credit of $2,940 from the corporation to Mr. Colandrea. The balance of the purchase price, $71,000, was to be paid by Cortland Realty, Ltd. in yearly installments set forth in the agreement and evidenced by seven promissory notes attached to it. The first note, due on October 15, 1973, called for payment of $11,000.

The remaining six notes, due on October 15 of the succeeding years, have a face value of $10,000 apiece. Each of the notes provides for interest at the rate of six per cent per annum. When the first note matured over a year after the execution of the stock redemption, Cortland Realty, Ltd.’s financial condition was so precarious that it was unable to meet its obligation to Mr. Colandrea. Cortland Realty, Ltd.’s earnings for the years immediately preceding and following the 1972 stock redemption agreement were as follows: Oct. 1971 — Sept. 1972 2 $572,635 Oct. 1972 — Sept. 1973 328,873 Oct. 1973 — Sept. 1974 64,367 Oct. 1974 — Sept. 1975 5,566 Oct. 1975 — Sept. 1976 4,952 By the time Mr. Colandrea filed his bill of complaint, five of the promissory notes totaling $51,000, with interest of $10,500, were in default.

Left a creditor of a barren corporation, Mr. Colandrea found it necessary to look elsewhere for payment of the promissory notes. Within three months of the execution of the stock redemption agreement Mrs. Colandrea incorporated Cortland, Ltd. which assumed Cortland Realty, Ltd.’s real estate sales operation. According to Mrs. Colandrea real estate sales comprised the far greater portion of Cortland Realty, Ltd.’s business. The corporate name of Cortland Realty, Ltd. was changed to Carmen Management Company, Inc. thirteen months after the stock redemption agreement ⁴²⁴ was signed.

Carmen Management continued the management of rental properties in which Cortland Realty, Ltd. was previously engaged. Bearing in mind the date of the stock redemption agreement, September 22, 1972, we shall review the history of Cortland Realty, Ltd., Cortland, Ltd., and Carmen Management Company, Inc. From the date of its incorporation on August 21,1967 until December 29,1972, Cortland Realty, Ltd. functioned as a real estate sales corporation, realizing the greater portion of its income from the sale of commercial and residential properties. On December 29, 1972, Cortland, Ltd. was incorporated. Thereafter, Cortland Realty, Ltd.’s income was derived primarily from leasing and management commissions.

Although no real estate listings were transferred from Cortland Realty, Ltd. to Cortland, Ltd., all new listings were taken under the brokerage Cortland, Ltd. Cortland, Ltd. operated in all locations that were formerly offices of Cortland Realty, Ltd. Cortland, Ltd. used the same furniture, phone number, and corporate logo as Cortland Realty, Ltd. All real estate agents associated with Cortland Realty, Ltd. transferred their licenses to Cortland, Ltd. The only real distinction between the business of Cortland, Ltd. and that of Cortland Realty, Ltd. was that Cortland, Ltd. did not solicit rental management accounts. This last remaining function of Cortland Realty, Ltd., however, was not long-lived. On October 18,1973 Mrs. Colandrea, her son, and her attorney changed the name of Cortland Realty, Ltd. to Carmen Management Company, Inc. This renamed corporation continued the property management segment of Cortland Realty, Ltd.’s business as a consequence of the corporate name change. On the same date Cortland Realty, Ltd. was reincorporated, but its existence continued only on paper.

The State Department of Assessments and Taxation annulled Cortland Realty, Ltd.’s charter on January 21,1976. The evidence adduced at trial reveals that Mrs. Colandrea became the sole shareholder in Cortland Realty, Ltd. after the stock redemption agreement. She was also a director and president of that first corporation. The same situation prevails with respect to the two later corporations, Cortland, ⁴²⁵ Ltd. and Carmen Management Company, Inc. Cortland, Ltd. became the chief beneficiary of the demise of Cortland Realty, Ltd. Its earnings for the fiscal years following its incorporation are listed below: Fiscal Year Gross Commissions May 1973 — April 1974 $ 870,504 May 1974 — April 1975 535,609 May 1975 — April 1976 645,373 Carmen Management Company, Inc., having assumed the less lucrative management operation, had earnings of $5,566 for fiscal year 1974 and $4,952 for 1975.

The effect of all these corporate machinations is obvious. By it Mrs. Colandrea was able to continue the profitable business of Cortland Realty, Ltd. without its attendant obligations to Mr. Colandrea. In order to recover payment of the promissory notes, Mr. Colandrea filed a Bill of Complaint in Equity against Cortland Realty, Ltd., Cortland, Ltd., Carmen Management Company, Inc., and Mrs. Colandrea, individually and in her capacity as president, officer and director of Cortland Realty, Ltd., Cortland, Ltd., and Carmen Management Company, Inc. The ultimate purpose of Mr. Colandrea’s complaint was to impose liability for the payment of the notes upon Cortland, Ltd., Carmen Management Company, Inc., and Mrs. Colandrea, personally. The above named corporations and Mrs. Colandrea then filed a counterclaim against Dominic J. Colandrea, Richard C. Adams, Irene Adams, Joan Bounds and El Toro Realty, Inc., charging, inter alia, breach of the stock redemption agreement by conducting a competing real estate business and injuring Cortland Realty, Ltd. by soliciting its clients and customers and divulging confidential information, and tortious interference with the contract rights of Cortland Realty, Ltd. and Mrs. Colandrea.

The chancellor dismissed the counterclaim as to all counterdefendants, stating specifically that “there isn’t any evidence that would be sufficient to show that he carried on any activities that were adverse to Cortland [Realty, Ltd.]. He may have, but there certainly isn’t any evidence to say he did.” ⁴²⁶ The chancellor filed his written opinion on June 21,1978 and passed on order dated August 22, 1978 entering judgment against the corporate defendants Cortland, Ltd. and Carmen Management Company, Inc. in the amount of $61,500 plus interest. The order further stated that no liability existed on the part of Mrs. Colandrea, individually, upon the notes. The chancellor, in his written opinion, elaborated upon his decision to spare Mrs. Colandrea liability on the notes.

His conclusion was based upon the rationale that there was no fraud or paramount equity present as a result of her actions; Mrs. Colandrea’s manipulations of the corporations were based, according to the chancellor, upon “sound corporate reasons”. There was, therefore, no intent to defraud on Mrs. Colandrea’s part and thus no justification for piercing the corporate veil. Upon examination of the record we are persuaded that, sound corporate reasons or not, there is clear and convincing proof that Mrs. Colandrea’s transfer of the business of Cortland Realty, Ltd. to Cortland, Ltd. and Carmen Management Company, Inc. constitutes fraud. The testimony of Mrs. Colandrea, coupled with the patent misrepresentation of the stock redemption agreement and promissory notes that the debt would be paid, compel us to conclude that the chancellor’s judgment on the evidence relative to fraud was clearly erroneous.

Md. R. 1086. Our reasons will be set forth in detail. The chancellor did, however, find liability on the part of Cortland, Ltd. and Carmen Management Company, Inc. based upon his conclusion that the two corporations were the results of corporate reorganizations and, hence, were mere continuations of Cortland Realty, Ltd. See generally, Fletcher Cyclopedia Corporation, §§ 7205, 7329 (1973); 19 C.J.S., Corporations, §§ 1578, 1593 (1940); 19 Am. Jur. 2d, Corporations, §§ 1550, 1559 (1965).

We shall affirm the judgments against Cortland, Ltd. and Carmen Management Company, Inc. but for a different reason. On appeal Mr. Colandrea raises the following issues: 1. Did the trial court err in refusing to impose liability on the individual defendant, Carmen J. Colandrea, by failing to enforce a paramount equity? ⁴²⁷ 2. Did the trial court err in refusing to impose liability on the individual defendant, Carmen J. Colandrea, by failing to make a finding of fraud? 3.

Did the trial court err in refusing to impose liability on the individual defendant, Carmen J. Colandrea, by failing to make a finding of fraudulent conveyance? Additional issues are raised by cross-appellants, Cortland Realty, Ltd., Carmen Management Company, Inc., Cortland, Ltd., and Carmen J. Colandrea: 4. Did the trial court err in imposing liability upon Cortland, Ltd. and Carmen Management Company, Inc. for the debts and obligations of Cortland Realty, Ltd. since cross-appellee failed to provide clear and convincing evidence of fraud or a paramount equity? 3 5. Did the trial court err in holding Cortland, Ltd. and Carmen Management Company, Inc. liable as the successors of Cortland Realty, Ltd.?

In an effort to avoid confusion we shall address the issues raised by the parties by considering the liability of first Mrs. Colandrea and then Cortland, Ltd. and Carmen Management Company, Inc. A. The Liability of Mrs. Colandrea Mr. Colandrea contends, and we agree, that Mrs. Colandrea has committed a fraud and thus cannot be shielded against individual liability upon the promissory notes by the corporate fiction of Cortland Realty, Ltd. This Court and the Court of Appeals have repeatedly stated that we will, in an appropriate case: “disregard the corporate entity and deal with substance rather than form, as though a corporation does not exist, * * * shareholders generally ⁴²⁸ are not held liable'for debts or obligations of a corporation except where it is necessary to prevent fraud or enforce a paramount equity.” (Citation omitted.) Bart Arconti & Sons, Inc. v. Ames-Ennis, Inc., 275 Md. 295, 310-11 , 340 A. 2d 225, 234 (1975). See Dixon v. The Process Corp., 38 Md. App. 644, 654 , 382 A. 2d 893 (1978), cert. den., 282 Md. 731 . We shall disregard the corporate entity of Cortland Realty, Ltd. and impose liability upon its sole shareholder because Mrs. Colandrea’s dealings, through the corporation, with Mr. Colandrea, can be termed nothing short of fraudulent. In order to establish fraud on the part of Mrs. Colandrea it was necessary that appellant provide clear and convincing proof, see Garris v. Dickey, 22 Md. App. 618, 630 , 325 A. 2d 156 (1974), cert. den., 273 Md. 720 (constructive fraud), Loyola Fed. S. & L. Ass’n. v. Trenchcraft, Inc., 17 Md. App. 646, 656 , 303 A. 2d 432 (1973), of each of the following five elements: (1) a material representation of a party was false, (2) falsity was known to that party or the misrepresentation was made with such reckless indifference to the truth as to impute knowledge to him, (3) the misrepresentation was made with the purpose to defraud (scienter), (4) the person justifiably relied on the misrepresentation, and (5) the person suffered damage directly resulting from the misrepresentation.

Suburban Properties Management, Inc. v. Johnson, 236 Md. 455, 460 , 204 A. 2d 326 (1964); accord Walsh v. Edwards, 233 Md. 552, 558 , 197 A. 2d 424 (1964); Lustine Chevrolet v. Cadeaux, 19 Md. App. 30, 34-5 , 308 A. 2d 747 (1973). The trial court, in refusing to pierce the corporate veil in this instance, stated that the evidence revealed that “any decision made by Mrs. Colandrea in regard to the corporations was made because of sound corporate reasons”, thus negating the element of scienter. The “sound corporate reasons” for the creation of Cortland, Ltd. and Carmen Management Company, Inc. cited by the trial court 4 included ⁴²⁹ (1) Mrs. Colandrea’s suspicions that Mr. Colandrea was raiding Cortland Realty, Ltd. of its sales personnel, and (2) the filing of a race discrimination suit against Cortland Realty, Ltd. several weeks prior to the execution of the stock redemption agreement. The chancellor’s ruling that there was no fraud or paramount equity was based upon the credibility of Mrs. Colandrea’s testimony.

Normally, under the authority of Md. R. 1086, we would not interfere with the trial court’s judgment in this regard, see Carling Brewing Co. v. Belzner, 15 Md. App. 406, 411-12 , 291 A. 2d 175 (1972), but the reasons given by Mrs. Colandrea are so devoid of merit that we must conclude the chancellor was clearly erroneous in his judgment on the evidence. Cf. Dixon v. The Process Corp., supra at 655. As to the first of the reasons relied upon by the chancellor, we are at a loss to understand his acceptance of Mrs. Colandrea’s suspicions that appellant was raiding Cortland Realty, Ltd. as “sound corporate reasons” when he had earlier dismissed the counterclaim embodying those suspicions for lack of sufficient evidence.

The other reason given by Mrs. Colandrea and relied upon by the chancellor is similarly without basis. According to Mrs. Colandrea’s testimony the incorporation of Cortland, Ltd. was prompted by a racial discrimination suit directed at Cortland Realty, Ltd.’s activities in the management of rental properties. As a result Mrs. Colandrea thought it best to separate the real estate sales and management functions of the original corporations. The chancellor’s reliance on Mrs. Colandrea’s rationale overlooks the fact that the presence of the pending litigation constituted a direct violation of a representation and warranty contained in the stock redemption agreement, which is as follows: “... no judgment, lien, suit, claim or proceeding ■pending or threatened against the Corporation anywhere; no condition, act or event which would constitute a breach or default by the Corporation; no ⁴³⁰ other basis for the assertion against the Corporation of any claim or liability not fully reflected or reserved against in the books of the Corporation.” The discrimination suit was filed on August 31, 1972, less than a month before execution of the stock redemption agreement.

This statement in and of itself constitutes actionable fraud, assuming the presence of clear and convincing proof of the other elements. Indeed, that theory is urged upon us by Mr. Colandrea. But we need not go into this aspect, for there is far more convincing evidence of fraud which was neglected by the trial court. Regardless of whether there were sound corporate reasons for the creation of the new corporations which deprived Cortland, Realty, Ltd. of its ability to pay the notes, we think the trial court clearly erred in failing to consider Mrs. Colandrea’s admission in a deposition, read into the record, that at the time she signed the agreement on behalf of the corporation, she had no intention of paying the notes.

The relevant portion of her deposition follows: “Q. I see. Based on what you testified to, am I correct in assuming that part of your reason for incorporating Cortland, Ltd. was to start a fresh corporation free of any liabilities? Objection. You may answer.

A. That was one of the reasons, that’s correct. Q. You previously gave other reasons. A. That’s correct. Q. Was it .your position, at the time, as officer and/or director of Cortland Realty, Ltd. and also Cortland, Ltd., that there would not have to be any pay back of those notes from the original corporation..

A. I’m sorry. What was the first part of your question? Q. In your capacity as officer and/or director of either of those corporations, once the new ⁴³¹ corporation was formed, was it your intention, at that time, to circumvent your payments of those notes back to Mr. Colandrea? A. No sir.

Q. Did you have the intention, at that time, to pay these notes back to Mr. Colandrea? A. No, I did not. Q. To the corporation? A. I did not.

Q. You had no intention at that time? A. No, because I thought it was unfair. Q. What did you think was unfair? A. I thought it was unfair that: number one, he would expect payment when the money was not there or would seriously jeopardize the health of the corporation which was the support of his children.

Number two, it was unfair due to the fact of the fraud, that the corporation should have to pay him. Q. So that when the new corporation was formed, then, you had no intention, the corporate defendant, Cortland Realty Ltd., had no intention of making any pay back on those notes. A. The new corporation had nothing to do with it.” In Tufts v. Poore, 219 Md. 1 , 147 A. 2d 717 (1959), the Court of Appeals stated: “Maryland has adopted the overwhelming majority rule of the American courts in holding that fraud may be predicated on promises made with a present intention not to perform.... The gist of the fraud in such cases is not the failure to perform the agreement, but the fraudulent intent of the promisor, the false representation of an existing intention to perform where such intent is in fact non-existent, and the deception of the promisee by such false promise.” Id. at 11-12 . ⁴³² Cortland Realty, Ltd., through its president, Mrs. Colandrea, entered into the stock redemption agreement with the deliberate intention and purpose of cheating and defrauding Mr. Colandrea, the other party to the contract.

The Court of Appeals has given fair warning as to the repercussions of such fraudulent acts of an agent: “In such a case not only is the corporation liable for such action, but the agents who engage in the conspiracy are personally liable for damages resulting from such a transaction. Agents of a corporation ... cannot hide behind the corporate shield and say they were acting solely as the agents of the corporation.” Ace Development Co. v. Harrison, 196 Md. 357, 367 , 76 A. 2d 566 (1950). Mrs. Colandrea obviously had no intention of permitting payment of the promissory notes by Cortland Realty, Ltd. But by entering into the agreement she was able to relieve Mr. Colandrea of his stock in the corporation. “... [W]here one person induces another to part with his money or property by means of a promise which he makes with the intention of not performing it, he is guilty of actionable fraud.” Appel v. Hupfield, 198 Md. 374, 382 , 84 A. 2d 94 (1951). The evidence presented by Mr. Colandrea meets all of the elements of fraud in accordance with the applicable burden of proof.

The corporation’s promise to pay Mr. Colandrea the full purchase price of the stock was a sham in light of Mrs. Colandrea’s admission; the falsity of this representation was known to Mrs. Colandrea when she signed the agreement on behalf of the corporation. Her statement constitutes clear and convincing evidence of an intention to defraud and, although there is no direct evidence on the point, a fair inference can be drawn that Mr.