Edenbaum v. Schwarcz-Osztreicherne

KRAUSER, J. Appellant Jonathan Edenbaum and appellee Klara Sehwarcz-Osztreicherne (“Schwarcz”) comprise the officers, directors and shareholders of Liberty Assisted Living, Inc. (“Liberty”), a closely held Maryland corporation, which owns and operates an eight-bed assisted living facility. When Edenbaum, as President of Liberty, relieved Schwarcz of her duties as the facility’s Director of Operations and discontinued her salary, Schwarcz filed a complaint in the Circuit Court for Montgomery County, claiming that Edenbaum and Liberty had breached their shareholders’ agreement. Having received neither salary nor profits since her termination, she requested damages and the dissolution of the corporation. Although the circuit court found that Edenbaum had rightfully removed Schwarcz as Director of Operations, it ruled that Schwarcz was, as a shareholder and director, entitled to post-termination salary and profits.

Holding both Edenbaum and Liberty liable for those unpaid sums, it entered a judgment in favor of Schwarcz and against Liberty and Edenbaum, in the amount of $89,880.00. But, as for Schwarcz’s request that Liberty be dissolved, it found that Edenbaum’s conduct was not so “oppressive” as to justify Liberty’s dissolution and, therefore, denied Schwarcz’s request. Cross-appeals followed, in which Edenbaum and Liberty questioned the court’s award of salary and profits to Schwarcz, and Schwarcz challenged the denial of her dissolution demand. For our review, Edenbaum and Liberty present four issues.

Reordered, they are: I. Whether Schwarcz was entitled to continue receiving her salary after her employment was terminated. ²³⁸ II. Whether the circuit court erred in awarding Schwarcz corporate profits for years in which, appellants claim, there were no such no profits.

III

Whether the circuit court erred in holding Edenbaum personally liable for profits and salary allegedly owed Schwarcz.

IV

Whether the circuit court erred in refusing to apply the “avoidable consequences rule.” On cross-appeal, Schwarcz presents one question. Reworded, it is: V. Whether the circuit court abused its discretion in declining to dissolve Liberty. For the reasons that follow, we shall vacate the judgments of the circuit court awarding Schwarcz salary and profits, vacate the denial of Schwarcz’s request for dissolution, and remand this case to the circuit court for it to clarify its findings as to Liberty’s profits in 2002 and 2003 and to consider dissolution or other less drastic remedies under Md.Code (1975, 1999 Repl.Vol.), § 3-413(b)(2) of the Corporations and Associations Article (“Corps. & Ass’ns”). Having so held, we need not and, therefore, shall not reach the question of whether the circuit court erred in refusing to apply the “avoidable consequences rule.” Background In June 1999, Schwarcz, a geriatric nurse, and Susan FehrSmith, a Maryland businesswoman, formed Liberty Assisted Living, Inc., for the purpose of owning and operating an assisted living facility in Maryland.

Fehr-Smith owned two-thirds of the corporation’s stock, while Schwarcz owned one-third. To implement their plans, they converted a house they had purchased into an assisted living facility. But, before the first patient had moved into that facility, Fehr-Smith informed Schwarcz that she wished to sell her interest in the corporation. Jonathan Edenbaum, who had experience in managing assisted living facilities, emerged as a potential purchaser of ²³⁹ Fehr-Smith’s shares.

Between December 2000 and early January 2001, Edenbaum and Schwarcz agreed that they would operate the business on a “50/50 basis.” On January 15, 2001, Edenbaum purchased most of FehrSmith’s shares, giving him a 51% interest in Liberty, and Schwarcz purchased Fehr-Smith’s remaining shares, increasing her interest in the corporation to 49%. At that time, Edenbaum and Schwarcz entered into a sparse, one-page agreement, entitled “Shareholder’s [sic] Agreement.” That agreement stated: Officers and Directors, Corporate Decisions, By-Laws, Charter: Jonathan and Klara be [sic] the two directors of the Company. Jonathan will be President, Secretary and Treasurer. Klara will be Vice President.

Jonathan will be the Chief Executive Officer (CEO) and Klara will be the Director of Operations. All shareholder decisions will be made by simple majority; no super-majorities shall be required for any shareholder decision. Jonathan’s vote will be controlling in any business decisions and/or disputes between the parties either as shareholders or directors. No action or vote of the shareholders or directors shall be valid without Jonathan’s consent.

The corporate charter and corporate by-laws shall be amended, and are hereby deemed to be amended, to reflect the provisions of the Shareholder’s Agreement. Sala,'ties: Jonathan and Klara will receive equal salaries (after bills have been paid for the month) and Jonathan will receive 50% profit and Clara [sic] will receive 50% profit. Jonathan’s Responsibilities: Marketing of the facility and giving tours to prospective clients and their families, business management decisions, in charge of all bills, generate resident bills, oversee all paperwork of resident files, hiring of consultants, keeping house ²⁴⁰ in compliance with state and county regulations. Jonathan will have the final say in all business and corporate decisions.

Klara’s Responsibilities: Cooking and cleaning of the home, patient care, grocery shopping, transportation for residents, laundry and daily house maintenance. Joint Responsibilities: Resident activities, hiring staff, decision on accepting residents or denying, admission, family interactions. Bank Account and Bills: A bank account will be opened in the Company’s name with Jonathan and Klara as joint signatories on the account. Klara may not authorize any vendors or pay any bills without Jonathan’s approval.

In sum, the parties’ agreement provided that both parties would be directors of the corporation; that Edenbaum would be President, Secretary, Treasurer, and Chief Executive Officer; and that Schwarcz would be Vice President and Director of Operations. It further stated that Edenbaum’s vote would be “controlling in any business decisions and/or disputes between the parties either as shareholders or directors” and that Edenbaum would “have the final say in all business and corporate decisions.” The agreement also spelled out the parties’ duties and responsibilities. While Edenbaum was responsible for paying “all bills,” “generat[ing] resident bills,” “hiring of consultants,” “[mjarketing of the facility,” making all “business management decisions,” “overseeing] all paperwork of resident files,” “giving tours to prospective clients and their families,” and “keeping [the] house in compliance with state and county regulations,” Schwarcz was responsible for the “[c]ooking and cleaning of the home, patient care, grocery shopping, transportation for residents, laundry and daily house maintenance.” ²⁴¹ The two shared responsibility for “[rjesident activities, hiring staff ... accepting residents” and “family interactions.” And finally, the agreement provided that Edenbaum and Schwarcz would receive “equal salaries” and share equally in the company’s profits. After a few months of operating the business together, Edenbaum grew increasingly dissatisfied with Schwarcz’s performance as Director of Operations and with the behavior of Schwarcz’s adult son, who resided at the facility with her.

To end their association, Edenbaum proposed that one of them should purchase the other’s stock. That proposal was followed by a letter dated September 4, 2001, in which Edenbaum presented Schwarcz with three options: either she would purchase his shares in Liberty for $125,000.00 in cash or he would purchase her shares for $65,000.00 in cash, or he would sell his shares to Susan Fehr-Smith and her husband. In the same letter, Edenbaum threatened that, if Schwarcz did not agree to one of the three options, she would be removed from her position as Director of Operations. If that occurred, he warned she would not receive any further salary, only share in the company’s profits, if there were any.

The letter apparently did not provoke the desired response. And, three weeks later, as promised, Edenbaum discharged Schwarcz from her position as Director of Operations and discontinued payment of her salary. Almost a year and a half after her termination, in February 2003, Schwarcz filed a complaint in the Circuit Court for Montgomery County against Edenbaum and Liberty, alleging breach of contract. Later, she added a request that Liberty be dissolved because of Edenbaum’s “illegal, oppressive and/or fraudulent” conduct.

Trial A bench trial was held in June 2004. At that trial, nine witnesses testified, 1 but, for the purposes of this appeal, we ²⁴² are only concerned with the testimony of three: Edenbaum, Schwarcz, and Dennis Colson, an accountant. Edenbaum’s Testimony Edenbaum testified that when he first became a co-owner of Liberty, his relationship with Schwarcz “was good.” But, after several months, their relationship changed. “All of a sudden she want[ed] weekends off, she want[ed] this, she want[ed] that, she want[ed] hired staff,” he said. She also, according to Edenbaum, “never” provided him with “any receipts for the petty cash” or the “grocery shopping,” as he requested.

And she bought “all sorts of things, crazy kinds of gourmet foods, Hungarian foods for herself and her family and [did] not stick[ ] to the menu.” Despite repeatedly warning Schwarcz to stop “transcrib[ing] medications from doctors’ orders because she really didn’t know how,” she continued the practice, Edenbaum testified. And, in violation of patient confidentiality, she would, according to Edenbaum, fax “incident reports and various things,” which she composed in Hungarian, to her daughter, who would then translate them into English and fax them back. Edenbaum also expressed his agreement with three other witnesses 2 that Schwarcz had been “rough” with a patient in the shower, had “pickfed]” another patient “up by a diaper” and had called another patient “ugly.” He further testified that Schwarcz’s relationship with the rest of the staff “was not good.” “She treated them as slaves,” he explained, frightening and “demean[ing]” them. Moreover, Edenbaum stated that he had had problems with Schwarcz’s adult son, Vincent, who was living at Liberty with ²⁴³ Schwarcz.

According to Edenbaum, Vincent was violent. He “scream[ed]” and “scared” the patients, Edenbaum claimed. When Edenbaum told Vincent he could not drink on the premises, Vincent threatened Edenbaum’s life, and on other occasions “cussed [him] out,” prompting Edenbaum to obtain a “peace order” in September 2001. “It was not,” Edenbaum testified, “a peaceful, serene environment, which is what it should be for geriatric patients.” Edenbaum further testified that, in the years since he became a eo-owner of Liberty, Liberty had had no “significant cash flow” or profits after all the bills and salaries were paid. In 2001, he and Schwarcz each received approximately $30,000.00 in salary.

After Schwarcz’s discharge, Edenbaum received, in 2002, almost $67,000.00. The increase occurred, he explained, because, after he relieved Schwarcz of her position as Director of Operations, he took over her duties and received her salary in addition to his own. As of the date of trial, Edenbaum had received in salary $24,750.00 for 2004. Schwarcz’s Testimony Schwarcz testified that she had never “done anything to threaten the safety of any resident” and denied that Edenbaum had ever approached her about her mistreatment of the residents.

Furthermore, to her knowledge, no residents had ever complained about her son’s behavior. Schwarcz stated that, before she was relieved of her duties at Liberty, she and Edenbaum were both receiving salaries of $4000.00 a month, but that she had not received any money, in either salary or profits, from Liberty since her termination. She further testified that Edenbaum had not conducted any shareholders’ or directors’ meetings or provided her with any reports concerning Liberty’s business since her termination. Colson’s Testimony Dennis Colson, Schwarcz’s accountancy expert, testified regarding Liberty’s tax returns and balance sheets for 2001 through 2003.

He stated that, in 2001, Edenbaum’s salary was $35,413.00, and Schwarcz’s was $32,455.00, but after her ²⁴⁴ termination, Schwarcz received no salary or profits, while Edenbaum received a salary of $66,500.00 in 2002 and of $60,500.00 in 2003. He further testified that, although Liberty had “profits” of approximately $9,400.00 in 2002 and $13,000.00 in 2003, the deductions it took for depreciation in those years created losses instead of profits. Liberty’s tax returns, he pointed out, showed a $24,420.00 deduction for depreciation in 2002 and a $22,939.00 deduction for depreciation in 2003. Had Liberty not taken the deductions, the tax returns would have shown, he concluded, “profits” of approximately $9,400.00 in 2002 and $13,000.00 in 2003.

Later, however, Colson qualified his answer, stating that he was talking about “cash flow” and not “profits.” He also conceded that Liberty’s 2002 balance sheet showed approximately $14,400.00 in mortgage payments that were “not reflected in the loss number” on the 2002 tax return and that similar mortgage payments in 2003 were “not reflected in the loss number” on the 2003 tax return. Circuit Court’s Ruling When the trial concluded, the court ruled that, under the terms of the shareholders’ agreement, Edenbaum had the right to relieve Schwarcz of her responsibilities at Liberty. But it declined to find that the shareholders’ agreement constituted an employment contract, stating: I do not find that this shareholders’ agreement constitutes an employment contract. It is an agreement, which was created by two shareholders to this corporation.

It provides how those shareholders will be paid. [It] provides that Mr. Edenbaum and Ms. Schwarcz will receive salaries and that Mr. Edenbaum and Ms. Schwarcz will receive 50 percent profit. So, I do not find that this creates an employment contract or an employment agreement. This is a shareholders’ agreement. And when Mr. Edenbaum made the decision to remove Ms. Schwarcz from the premises and relieve her ²⁴⁵ from the responsibilities that she had, that did not relieve Mr. Edenbaum or the corporation of its obligations to pay her as a director of the company under the salaries that had been agreed to in the shareholders’ agreement.

The court awarded Schwarcz post-termination salary for 2002, 2003, and 2004, as well as the difference between Edenbaum’s salary and hers in 2001. Then, relying on Colson’s testimony, the court found that Liberty had profits in 2002 and 2003 and awarded Schwarcz 50% of what it calculated to be profits of $11,047.00. In total, the court awarded Schwarcz $89,880.00, and held Edenbaum and Liberty jointly and severally liable for that sum. In doing so, the trial judge stated: I find that Ms. Schwarcz is entitled to judgment.

I am going to enter judgment against each of the defendants in this case in the total amount of $89,880.00, which is broken down as follows: 2002 salary, 33,250; 2003 salary, 30,250; 2004 salary, 12,375, and one half of the difference in 2001 is $2,958. I am also adding to that the testimony from the accountant, who testified as to what the profits would have been. And Ms. Schwarcz’s 50 percent of the 2002 profits is $4,457; 2003, 50 percent of that profit is $6,500, for a total judgment in favor of the plaintiff against each of the defendants in the amount, jointly and severally, in the amount of $89,880. Rejecting Schwarcz’s claim that Edenbaum’s conduct was oppressive, the trial judge observed: I am not satisfied that Mr. Edenbaum engaged in oppressive conduct.

He has the right under the shareholders’ agreement to do what he did, he made a business decision to do it, and under the shareholders’ agreement, he was in his right to do so ... Ms. Schwarcz, no longer being a part of having those responsibilities assigned to her, however, is certainly entitled to be paid pursuant to the shareholders’ agreement and it is not — her interest in the corporation isn’t being divested, she is not being forced out of the corporation, and she is ²⁴⁶ still entitled to share in the profits and the salary that is being paid pursuant to the shareholders’ agreement. The trial judge then concluded: So, I do not see the conduct of Mr. Edenbaum as constituting oppression, so I will not order a dissolution. Standard of Review The standard of review for a non-jury trial is governed by Maryland Rule 8-131.

That rule provides that this Court “will not set aside the judgment of the trial court on the evidence unless clearly erroneous, and will give due regard to the opportunity of the trial court to judge the credibility of the witnesses.” Md. Rule 8-131(c). In reviewing the circuit court’s findings, we view the evidence “ ‘in a light most favorable to the prevailing party.’” Gen. Motors Corp. v. Schmitz, 362 Md. 229, 234 , 764 A.2d 838 (2001)(quoting Ryan v. Thurston, 276 Md. 390, 392 , 347 A.2d 834 (1975)). While the factual determinations of the circuit court are afforded significant deference on review, its legal determinations are not. “ ‘[T]he clearly erroneous standard for appellate review in [Maryland Rule 8-131(c) ] does not apply to a trial court’s determinations of legal questions.’ ” Ins.

Co. of N. Am. v. Miller, 362 Md. 361, 372 , 765 A.2d 587 (2001)(quoting Heat & Power Corp. v. Air Prods. & Chem. Inc., 320 Md. 584, 591 , 578 A.2d 1202 (1990)). The appropriate inquiry for such determinations is whether the circuit court was “legally correct.” Md. Envtl. Trust v. Gaynor, 140 Md. App. 433, 440 , 780 A.2d 1193 (2001), rav’d, on other grounds, 370 Md. 89 , 803 A.2d 512 (2002).

Discussion I. The circuit court held that the Edenbaum-Schwarcz shareholders’ agreement was a shareholders’ agreement, not an employment contract. Therefore, as either a shareholder or a director (the court was not altogether clear in which capaci ²⁴⁷ ty), 3 Schwarcz was entitled to continue to receive her salary after she was terminated as Director of Operations. Edenbaum and Liberty claim, however, that the shareholders’ agreement was in part an employment agreement, that Schwarcz was receiving her salary, under that agreement, as Director of Operations, and that, once she was lawfully terminated from that position, she was no longer entitled to receive a salary for a position she no longer occupied. We find much merit to their position.

As noted, Liberty is a closely held corporation. Unlike “close corporations,” which are defined by statute in Maryland, 4 a closely held corporation has “no single, generally accepted definition.” Donahue v. Rodd Electrotype Company of New England, 367 Mass. 578 , 328 N.E.2d 505, 511 (1975). However, closely held corporations commonly possess the following attributes: “(1) a small number of stockholders; (2) no ready market for the corporate stock; and (3) substantial majority stockholder participation in the management, direction and operations of the corporation.” Donahue, 328 N.E.2d at 511 ; see F. Lodge O’Neal & Robert B. Thompson, O’Neal & Thompson’s Close Corporations and LLCs: Law and Practice § 1:2, 4-5 (3d ed.2004). ²⁴⁸ Shareholder agreements of closely held corporations, among other things, usually mandate the structure of the business’s management; name the officers and directors of the corporation; spell out the voting rights of the shareholders; outline when, to whom and under what conditions a shareholder may sell his or her shares; establish a “method or formula for fixing the purchase price of shares”; and govern the operation of the enterprise. Kerry M. Lavelle, Drafting Shareholder Agreements for the Closely-Held Business, 4 DePaul Bus.

L.J. 109 , 112-17, 120 (1991); see Harry G. Henn & John R. Alexander, Laws of Corporations, § 198 (3d ed.1983). Because shareholders’ agreements commonly provide for the corporation to purchase shares when certain events occur (such as death of a shareholder), the corporation itself is usually a party to such an agreement. Id. at 111. The Edenbaum-Schwarcz shareholders’ agreement was, in one sense, more modest in scope than a typical shareholders’ agreement and, in another sense, more expansive.

It did not provide for shareholders’ voting rights, or outline when, to whom and under what conditions a shareholder may sell his or her shares. Nor did it provide a method or formula for fixing the purchase price of shares. But, unlike a pure shareholders’ agreement, it did set forth the positions, duties, and salaries of the corporate officers and employees, that is, the duties of Edenbaum and Schwarcz. Consequently, Edenbaum and Liberty claim that the shareholders’ agreement was not merely a shareholders’ agreement, but an employment agreement as well: one between Schwarcz and the corporation.

Although the corporation was not formally named as a party to the agreement, it is Edenbaum’s position that he signed the shareholders’ agreement as an officer, “employing” Schwarcz as Liberty’s Director of Operations. That a shareholders’ agreement may also constitute an employment agreement has been implicitly recognized by this Court in Goerlich v. Courtney Industries, Inc., 84 Md.App. 660 , 581 A.2d 825 (1990). In Goerlich , we affirmed the circuit court’s dismissal of a malpractice action brought by a terminated shareholder-employee against the attorney-drafter of a ²⁴⁹ shareholders’ agreement, which the shareholder-employee had believed provided him with employment for so long as the corporation endured. In doing so, we stated that, because of the indefinite nature of his employment under the shareholders’ agreement, he was at most an employee at-will and could therefore be discharged from his employment at any time.

Although the court below did not address the question whether Schwarcz was an at-will employee of Liberty, it did state that Edenbaum “was within his right,” under the shareholders’ agreement, to “remove[ ] Ms. Schwarcz from her responsibilities” as Director of Operations, because Edenbaum had “the final say,” under that agreement, “in all business and corporate decisions.” In short, Edenbaum had the right, granted him by the shareholders’ agreement, to discharge Schwarcz from her position with the company. To later state, as the circuit court did, that the agreement was not an employment agreement is incongruous. If Schwarcz can be discharged under the terms of an agreement, then whatever that agreement was formally called, it was, in part at least, an employment agreement, because it governed the termination of her employment. Moreover, the agreement assigned no duties to Schwarcz as a director of the corporation, but it did as Director of Operations.

Her responsibilities, as Director of Operations, encompassed all those things that ensured the smooth operation of the facility, including “cooking and cleaning of the home, patient care, grocery shopping, transportation of residents, laundry and daily house maintenance,” as well as duties she shared with Edenbaum, such as “resident activities, hiring staff, decision on accepting residents or denying, admission, family interaction.” Thus, the “salary” she was to receive was clearly intended to compensate for her work in that capacity. Sehwarcz’s relationship to the corporation, as Director of Operations, fits, of course, the very definition of employment: “Employment is a relationship created expressly or impliedly by an agreement calling for the employee to perform work under the control of the employer in return for some consider ²⁵⁰ ation by the employer.” Stanley Mazaroff & Todd Horn, Maryland Employment Law § 3.01(1) (2d ed.2004). To form an employment contract, “[a]t a minimum, the parties must agree to the work to be performed by the employee and the consideration the employer will give in return for this work.” Id. Here, the shareholders’ agreement stated both the work that Schwarcz was to perform, under the control of Edenbaum as Chief Executive Officer, and the consideration she would be paid for that work.

As the canons of contract construction require us to ascertain the intent of the contracting parties, Society of Am. Foresters v. Renewable Natural Resources Found., 114 Md.App. 224, 234 , 689 A.2d 662 (1997), and, in doing so, to interpret a contract as a whole, Sullins v. Allstate Ins. Co., 340 Md. 503, 508 , 667 A.2d 617 (1995), we can reach no other conclusion but that the shareholders’ agreement was also an employment agreement. Whether it was an at-will agreement, we need not decide, because appellee