Crawford v. Mindel

LISS, Judge. On September 14, 1981, Douglas B. Mindel, Ernest H. Blankenship and Tasco, Inc., the appellees herein, filed a declaration in the Circuit Court for Charles County against James H. Crawford, the appellant. In their suit the appellees alleged unlawful, wrongful and unauthorized actions by the appellant in an effort to gain control of Tasco, Inc., a body corporate of the State of Maryland. Appellees sought declaratory and injunctive relief, and compensatory and punitive damages against the appellant.

By agreement the case was bifurcated, heard initially on the issue of liability, and thereafter on the issue of damages. At the conclusion of the trial on liability the trial court found that the appellant’s actions amounted to an illegal and fraudulent attempt to gain control of Tasco, Inc. The trial judge granted declaratory and injunctive relief but reserved his finding on the question of malice. At the conclusion of the trial on the issue of damages the court held that all appellees had suffered damages and concluded that Crawford’s actions which resulted in the termination of Mindel’s ¹¹⁷ and Blankenship’s interests in Tasco, Inc. had been malicious. On October 15, 1982, judgment was entered in favor of appellee Mindel for $7,744.70 compensatory damages and $5,000.00 punitive damages; in favor of appellee Blankenship for $5,881.08 compensatory damages and $5,000.00 punitive damages; and in favor of appellee Tasco, Inc. for $114,905.69, with costs to be paid by the appellant.

Appellant entered a timely appeal and has raised the following issues to be determined: I. Was the trial court’s finding of fraud in appellant’s attempted take-over of Tasco, Inc. clearly erroneous?

II

Was the court required to enunciate the standard of proof which it applied?

III

Was the award of compensatory damages proper under the facts found by the trial court?

IV

Was the award of attorney’s and auditor’s fees legally correct? V. Was the award of punitive damages permissible in light of the factual and legal conclusions of the trial judge?

VI

Did the court properly award damages for lost wages? Tasco, Inc., a Maryland corporation, was chartered in 1971. By its terms the charter permitted issuance by the corporation of a maximum number of 500 shares of common stock. The initial issuance of shares was to Ken Der, Ernest H. Blankenship and Donald Hancock; one hundred and fifty shares each.

In 1975, James H. Crawford became a shareholder and the distribution of shares was modified so that Der, Blankenship, Hancock and Crawford had one hundred and thirteen shares each. By an agreement dated February 19, 1980, the corporation bought back all of Ken Der’s shares. By an agreement dated May 7, 1980, the corporation bought back all of Donald Hancock’s shares. ¹¹⁸ On August 11, 1980, Douglas B. Mindel purchased fifty-seven shares and acquired the right, by agreement, to purchase an additional fifty-six shares, so that at that time the shareholders were Crawford and Blankenship with one hundred and thirteen shares each and Mindel with fifty-seven shares and contract rights to purchase another fifty-six shares. Sometime after Mindel’s purchase of stock in August of 1980 there was a shareholder’s meeting at which all three shareholders were elected as members of the board of directors and officers (Blankenship — President, Mindel — Vice President, Crawford — Secretary/Treasurer and chairman of the board of directors) of the corporation.

This remained the management structure of the corporation until the events of August, 1981 out of which the lawsuit in question arose. On August 12, 1981, Mindel and Blankenship, at an officers’ meeting, presented a memorandum to Crawford dated August 10, 1981, which detailed several problems they perceived, including Crawford’s failure to attend properly to corporation business, his abuse of corporate credit cards and his failure to put in a full work week. Appellant’s response was to call a director’s meeting scheduled at an attorney’s office the next day. Only appellee Blankenship received notice of the meeting.

On the morning of August 13, 1981, appellees Mindel and Blankenship appeared at the offices of attorney Joseph Kneib, intending to participate in the meeting of the directors. On arriving they noticed appellant’s automobile parked outside Mr. Kneib’s office; however, after waiting they were finally informed, by telephone, that appellant would not be available. On August 14, 1981, appellant conducted a board of directors meeting, without Mindel and Blankenship. Only Crawford himself and Ken Der (an earlier shareholder whose stock had been purchased by the corporation) were present.

It was appellant’s contention that the presence of himself and Ken Der constituted a proper quorum. ¹¹⁹ Appellant proceeded to authorize the purchase of one hundred and sixty-one shares of additional stock to be issued by the corporation to himself, thus claiming ownership of a majority of the outstanding shares of common stock of the corporation. He removed appellees Mindel and Blankenship as both directors and officers and elected Edward J. Miller as vice president and to the board of directors along with appellant’s wife. Appellant then terminated the employment of Mindel and Blankenship. After the trial on the liability portion of the case appellees Mindel and Blankenship were declared to be directors and officers of the corporation.

On November 4, 1981, appellees returned to control of the corporation and removed appellant as a director and officer. Upon their return, when appellees discovered that financial records and corporate funds were missing, an audit was ordered. The audit revealed that over $97,000.00 had been deposited in two new bank accounts, then paid out to appellant Crawford, Edward Miller and other noncorporate beneficiaries. The audit also revealed other questionable disbursements from the corporation.

On the basis of the audit the trial judge entered judgment in favor of Tasco, Inc. I. The elements of actionable fraud as enunciated by the Court of Appeals in James v. Weisheit, 279 Md. 41, 44 , 367 A.2d 482 (1977), are as follows: (1) that a representation made by the respondent was false; (2) that its falsity was known to him; (3) that the misrepresentation was made for the purpose of defrauding the plaintiff; (4) that the plaintiff not only relied upon the misrepresentation, but had the right to do so and would not have done the thing from which the damage resulted if it had not been made; and (5) that the plaintiff suffered damage (meaning an injury subject to being redressed by compensatory damages) directly resulting from the respondent’s misrepresentation. [Footnote omitted]. [Citations omitted]. ¹²⁰ See also Martens Chevrolet, Inc. v. Seney, 292 Md. 328 , 439 A.2d 534 (1982). Appellant argues that appellees have failed to prove reliance, one of the key elements for relief against fraud. Savings Banks Retirement System v. Clarke, 258 Md. 501, 503 , 265 A.2d 921 (1970). In the absence of a fiduciary relationship, fraud is never presumed but must be proved.

Bathan v. U.S., 173 F.2d 953 (4th Cir.1949). An officer and director of a corporation, as a matter of law, occupies a fiduciary relationship as regards the corporation. Merchants Mortgage Co. v. Lubow, 275 Md. 208, 215 , 339 A.2d 664 (1975); Waller v. Waller, 187 Md. 185, 194 , 49 A.2d 449 (1946). Although a party is usually required to exercise ordinary diligence to discover fraudulent conduct of the opposite party, different standards are applied where fiduciaries are involved.

Merchants Mortgage Co. v. Lubow, supra. Where a fiduciary relationship exists, fraud may be presumed. See Republic Realty Co. v. Phoenix Savings and Loan Ass’n., 250 Md. 549, 558 , 243 A.2d 858 (1968). Fraud is a generic term and in equity embraces “all acts, omissions, and concealments which involve a breach of legal or equitable duty, trust, or confidence justly reposed, and are injurious to another or by which an undue and unconscientious advantage is taken or another.” [Citation omitted].

It is not necessarily a single fact but a conclusion which is drawn from all the circumstances of the case [citation omitted], and includes constructive as well as actual fraud. [Citation omitted]. It taints and vitiates all that it touches. [Citation omitted]. This is especially true when the victim occupies a position of confidence and trust with the perpetrator of the fraud____ Green v. Lombard, 28 Md.App. 1, 12 , 343 A.2d 905 (1975). Based on the fiduciary duty appellant Crawford owed to the corporation and the individual appellees, his conduct may be categorized as a classic example of construe ¹²¹ tive fraud, which usually arises from a breach of duty where a relationship of trust and confidence exists.

See Scheve v. McPherson, 44 Md.App. 398 , 408 A.2d 1071 (1979). Where, as in this case, a party is justified in believing that the other party will not act in a manner adverse or inconsistent with the reposing party’s interest or welfare, constructive fraud may be found to arise from a violation of this belief. Midler v. Shapiro, 33 Md.App. 264 , 364 A.2d 99 (1976). The trial judge had evidence before him which, if believed, established that appellant had purchased one hundred and sixty-one shares of stock from Tasco, Inc. at substantially below market value, and that the purchase had been authorized by an illegally constituted board of directors of the corporation acting without the prior notice required by law having been given to the stockholders of the corporation.

In addition, the judge had before him evidence, if believed, that appellant had received substantial amounts of funds, without proper documentation or authorization. Even if we accept, arguendo, that it is necessary that appellees establish reliance on the acts of the appellant, that requirement is found in the fraudulent disbursement of corporate funds to the detriment of the appellees and the sale of the corporate stock at a price substantially below its value. We find no merit in appellant’s contention on this issue.

II

Appellant next contends that the trial judge erred in that he applied an incorrect standard of proof required to be met by the appellees in order to establish fraud. Appellant argues that the standard should have been clear and convincing proof and that the trial court instead applied a mere preponderance of the evidence test. We have carefully read the record extract and nowhere do we find anything to substantiate appellant’s bald assertion. The appellees acknowledge that Maryland has a clear and convincing standard of proof as a requirement in a civil action for fraud, ¹²² but in a trial without a jury the trial judge is not required to enunciate the standard which he is applying.

In a similar situation this Court said, in Aeropesca Ltd. v. Butler Aviation International, Inc., 44 Md.App. 610, 624 , 411 A.2d 1055 (1980): While the judge did not articulate that he was applying the “clear and convincing standard” vis-a-vis that of “preponderance of evidence” there was no requirement that he do so. “Judges,” we said in Hebb v. State, 31 Md.App. 493, 499 , 356 A.2d 583, 587-88 (1976), “are presumed to know the law. [Citations omitted]. Absent an indication to the contrary, we must assume that judges apply the law correctly to the case before them.” III. Appellant argues that the trial judge erred in awarding compensatory damages to Tasco,