Ettridge v. TSI Group, Inc.

McAULIFFE, Judge. The owner of forty-nine percent of the common stock of a corporation seeks dissolution of the entity, claiming illegal, oppressive, or fraudulent conduct on the part of those in control of the corporation. The majority stockholder and the corporation resist this effort, contending among other things that the suit is barred because the action was brought with an improper motive, and because the minority stockholder may not introduce evidence of any wrongdoing that antedated his acquisition of his interest in the corporation. To complicate matters, internecine warfare rages just beneath the surface of this corporate controversy.

The minority stockholder is the son of the majority stockholder, who has been embroiled in divorce proceedings with the minority stockholder’s mother. According to the son, his father has manipulated the corporation to conceal assets, to deprive his wife of her financial due, and to favor his alleged girlfriend. According to the father, the son ac ³⁶ quired his stock and brought this action solely for spite and retribution. Moreover, says the father, the person from whom the son acquired his stock was a willing participant in the corporate activities about which the son now complains, and because the predecessor stockholder would have been estopped to complain, so also is the successor to that interest.

I. The minority stockholder is Steven D. Ettridge (Steven). The majority stockholder is Wesley D. Ettridge (Wesley), Steven’s father. The corporation is TSI Group, Inc. (TSIG). Wesley’s estranged wife, and mother of Steven, is Evelyn Ettridge (Evelyn).

In the mid-1960’s, Wesley and Evelyn established a temporary office staffing company known as Executive Staffing, Inc. (ESI). Wesley owned fifty-one percent of the common stock of ESI, and Evelyn owned the remainder. By 1982, this successful business was being conducted through Diversified Business Systems, Inc. (DBS), a wholly owned subsidiary of ESI. In 1981, divorce proceedings between Wesley and Evelyn were begun in Virginia.

Steven claims that shortly thereafter his father embarked upon a series of actions designed to conceal assets from the domestic relations court, to wrongfully dilute Evelyn’s interest in ESI, to diminish the value of her holdings, and to provide the father with hidden income diverted from the family business. To explain the involvement of TSIG, and for a general understanding of the legal principles involved, we set forth certain of the facts alleged by Steven. 1 According to Steven, Wesley formed TSIG in 1984. Although all of the common stock of TSIG was issued to Katherine Collins (who was then president of DBS and ESI), ³⁷ there was a secret oral understanding between Collins and Wesley that upon demand Collins would transfer to Wesley at least fifty percent of the stock of TSIG. This arrangement allowed Wesley to deny any ownership interest in TSIG while the divorce proceedings continued.

Wesley then arranged to have DBS issue 400 shares of stock (in addition to the 200 shares previously issued, and owned by ESI), which were sold to TSIG for $60,000. The funds for the purchase of the new DBS stock were obtained through a bank loan, which Wesley and Collins co-signed. Steven contends that this loan has been paid with funds taken from DBS. Steven also claims that $129,000 belonging to either DBS or TSIG was then diverted to MBA Temporaries, Inc. (MBA), an unaffiliated temporary services company in Virginia, without any arrangement for repayment.

The stock of MBA is owned by Mary Gardner, alleged girlfriend of Wesley, who has no experience in the temporary placement business. Gardner bought the MBA stock with a downpayment of $5,000 and a promise of monthly payments. Steven says MBA promptly repaid Gardner the $5,000 she gave as a downpayment, using DBS corporate funds which had been diverted to MBA. Steven further contends that DBS also paid Gardner’s monthly obligations for the purchase of that stock.

Moreover, MBA has sent “salary” or “dividend” checks of $2,500 per month to Gardner, who turned the money over to Wesley. To make up the shortfall in MBA caused by these payments, DBS and TSIG funds were improperly diverted to MBA. Steven says that Wesley stands to profit from this preferential treatment of MBA because he has an ongoing option to purchase all the shares of MBA stock from Gardner for $5,000. Steven also contends that in 1984 Wesley set up a sham sale of his ESI stock to TSIG, in order to skim assets from TSIG without generating any record of payment of salary or dividends to him.

Wesley “sold” his ESI stock to TSIG for $26,000, receiving $5,000 down and the balance to be paid to him in monthly payments. Wesley received six ³⁸ payments of $693.75, the amount needed by him to make his alimony payments. He then arranged for TSIG to “default” in its payments, and he demanded and received the return of his stock from TSIG without returning any part of the $9,162.50 TSIG had paid to him. Steven claims that Wesley has also caused TSIG to enter into an agreement which could, on short notice, reduce the corporation to a shell.

He did this by having TSIG pledge to Gardner the 400 shares of DBS it owns, as security for a demand note of $25,000 given by TSIG to Gardner for a loan. Thus, says Steven, Wesley and Gardner have set the stage for Gardner’s quick take-over of the major asset of TSIG by having Gardner demand payment, TSIG default, and Gardner buy the hypothecated DBS stock at a forced sale. Steven also generally claims that TSIG funds have been diverted to other corporations controlled by Wesley, or in which Wesley has an interest; that TSIG funds are used to pay employees of unaffiliated corporations; that excessive salaries are being paid to employees willing to participate in the transactions orchestrated by Wesley; that TSIG has undertaken the payment of more than $250,000 in employee withholding taxes owed by other corporations; and, that TSIG is delinquent in the payment of its own employment taxes. Finally, Steven says that TSIG has refused to permit him to inspect and copy the corporation’s books and accounts as is his right under § 2-513 of the Corporations and Associations Article of the Maryland Code (1975, 1985 Repl.Vol.) On May 31, 1985, Steven filed a complaint in the Circuit Court for Montgomery County for dissolution of TSIG, alleging illegal, fraudulent, and oppressive acts by those in control of the corporation. 2 Steven also sought interlocu ³⁹ tory relief, including the immediate appointment of a receiver and an injunction to prohibit the officers of the corporation from further diluting the interest of the stockholders, diverting corporate funds for their own use or the use of others, or wasting corporate assets.

TSIG answered, denying that any acts had taken place which would justify granting the relief sought by Steven. More important for the purposes of this appeal, TSIG said that Steven had no standing to seek relief because 1) he was not a stockholder at the time of the wrongs alleged, and 2) he acquired his stock from Collins, who was a knowing participant in the wrongs alleged. A hearing on Steven’s request for interlocutory relief was conducted by Judge James McKenna. On the second day of the hearing, Judge McKenna interrupted the presentation of Petitioner’s case and invited argument from counsel on Respondent’s assertion that even if the allegations of misconduct were true, Steven did not have standing to complain.

Steven argued that his statutorily grounded claim for dissolution was not subject to the requirement of contemporaneous ownership or defenses of estoppel which might have been applicable to common law actions for damages. Furthermore, he argued, there was sufficient evidence of continuing illegal, oppressive, or fraudulent conduct to justify the granting of relief, even if he were precluded from relying on the earlier acts for any purpose other than giving color or meaning to the acts that had occurred since he acquired his stock. The trial judge, without receiving additional evidence, entered an order denying Petitioner’s request for interlocutory relief. In a brief oral opinion, Judge McKenna said he assumed for the purpose of disposition that the evidence concerning acts which occurred before Steven obtained his stock would show fraud.

He held, however, that Steven lacked standing to complain about those antecedent acts. Steven proffered ⁴⁰ that his evidence would show new and continuing fraudulent acts by those in control of the corporation, occurring after Steven’s acquisition of the stock. Judge McKenna refused to receive evidence in support of this proffer, stating that even if such facts were proven they would not alter the result. Steven appealed from the order denying interlocutory relief, and we granted certiorari prior to consideration of this matter by the Court of Special Appeals.

II

Before discussing in greater depth the substantive issues involved, we address the procedural question raised by Respondent’s motion to dismiss the appeal. Respondent contends that an order denying interlocutory relief is not appealable. That statement, while perhaps useful as a general rule of thumb, is too broad. Generally, an appeal is allowed only from a final judgment.

Courts and Judicial Proceedings Article, § 12-301, Maryland Code (1974, 1984 Repl.Vol., 1987 Cum. Supp.). There are a number of exceptions to the general rule, however, including statutory exceptions which deal expressly with appeals from interlocutory orders. Section 12 — 303(3)(iii) of the Courts and Judicial Proceedings Article permits an appeal from an interlocutory order refusing to grant an injunction.

Judge McKenna’s denial of all requested interlocutory relief necessarily included a denial of the request for an interlocutory injunction, and to that extent the order is immediately appealable. Respondent contends that even if Petitioner may appeal from so much of the order as denied injunctive relief, he may not now appeal from the interlocutory refusal to appoint a receiver. Respondent is correct. Section 12-303(3)(iv) permits an -appeal from an interlocutory order appointing a receiver (provided the appellant has first filed an answer to the complaint), but grants no concomitant right of appeal from an interlocutory order refusing to appoint a receiver.

Respondent further suggests that be