Kalb v. Vega

⁶⁵⁶ WILNER, Judge. On or about June 15, 1978, Gerald Kalb sold to Richard Vega 98 shares of common stock in a corporation known as Telecommunications Systems, Inc. (TSI). The purchase price was $6,000. Kalb later came to believe that he had been defrauded by Vega — that the stock was worth a great deal more than $6,000, and that by a combination of concealment and affirmative misrepresentation Vega had induced Kalb to sell the stock for the lower price.

On November 15, 1979, Kalb sued Vega in the Circuit Court for Baltimore City seeking a rescission of the sale and the return of the stock. The case was later transferred to Anne Arundel County. In June, 1980, before the case came to trial, Vega sold the 98 shares, along with 98 other shares that he had owned previously, to a third party, Fischer Medical Publications, Inc. (Fischer). Fischer, shortly thereafter, sold all of its stock, including Kalb’s 98 shares, to a fourth party.

As both Fischer and its transferee were regarded as bona fide purchasers, thereby making rescission of the Kalb-Vega agreement impossible, Kalb’s action against Vega became one for conversion, in which the principal relief sought was damages. On November 3, 1982, after a full trial and the receipt of post-trial memoranda, the court filed a written opinion and order, in which it found that (1) Vega had indeed misrepresented the value of the stock in connection with the June, 1978 sale, but (2) Kalb had failed to prove the actual value of the stock at that time. Believing that the appropriate measure of damages was the value of the stock at the time it was sold to Vega, the court entered judgment in favor of Kalb for nominal damages of $1.00. Both Kalb and Vega are displeased with the judgment.

Kalb thinks that he is entitled to the difference between the $6,000 he received from Vega in 1978 and the $59,000 that he calculates Vega received from Fischer for the 98 shares in 1980. Vega has no problem with the court’s finding as to damages, but assails the finding that he was guilty of ⁶⁵⁷ misrepresentation. Thus, we have cross-appeals. Vega will lose both of them.

Vega's Appeal: Liability The court’s findings with respect to Vega’s alleged misrepresentation are mixed ones of law and fact. The real dispute is over what Vega told Kalb about the condition and prospects of TSI in order to induce him to sell the stock for $6,000, and how Vega’s representations squared with the actual condition and prospects of the company. The evidence regarding those questions is, to some extent, in conflict, and we are thus governed by the strictures of Md.Rule 1086. We do not weigh the evidence; we look only to see if there was any substantial evidence in the record to support the court’s factual conclusions.

If there is any such evidence, we are not at liberty to disturb those conclusions. TSI was founded in 1974 by Vega, Kalb, and Fischer. As its name implies, it was in the telecommunications business. Specifically, it was formed to provide microwave “pay television” programming and other kindred services in cities having no existing cable TV system.

Under FCC licenses, TSI would build and operate transmitter facilities and sell air time over those facilities to other entities who would then market the programs to individual homes. Kalb and Vega had some experience in the telecommunications industry; they were to “run” the business, Vega acting as President and Kalb as Vice-President. Fischer’s role was essentially that of financier; it put up most of the capital. Of the 400 shares of stock initially issued, Fischer received 204 (51%), and Kalb and Vega each received 98 or 24 1 /2%. 1 Kalb and Vega each signed identical employment agreements calling for each to devote his “full time and ⁶⁵⁸ efforts” to the company and to “perform his duties faithfully, diligently and to the best of his ability.” Paragraph 6 of the agreement provided a caveat to the “full time” requirement.

It stated: “The Company acknowledges that the Employee is a recognized Telecommunications expert and may from time to time be engaged by other entities to provide consulting services. The Company agrees to permit the Employee to engage in, and be compensated for by others, occasional consulting opportunities on a non-interference basis with the Company’s day-to-day business activities. Further, the Employee agrees that (a) he shall not become engaged with companies and/or individuals in direct competition with the Company, (b) he shall not become engaged by anyone to support claims against the Company, and (c) he shall neither furnish nor divulge to anyone any knowledge or information relating to the confidential processes of the Company.” TSI commenced its business shortly after its formation by purchasing from another company an existing FCC license authorizing transmission in Baltimore and two FCC construction permits authorizing the construction of transmission facilities in Richmond, Virginia, and Allentown, Pennsylvania. Upon completion of the transmission facilities, these permits would become licenses to operate.

With the licenses and permits, TSI also acquired certain equipment necessary to construction and operation of the transmission facilities in those cities. The transmission facility for Baltimore was in place in 1974, and all TSI had to do there was to sell the air time. To do that, it created a wholly-owned subsidiary known as Premium Cinema Club, sold the air time to it, and had it (Premium) offer the programming to the ultimate consumers. The Baltimore market thus became operational, and revenue-producing, in early 1975.

TSI was not as fortunate in Richmond or Allentown; the transmission facilities there were not completed until some time in 1977. ⁶⁵⁹ In 1976, the FCC issued a new ruling or interpretation that forbade licensees from selling both the air time and the programming — i.e., doing what TSI was doing in Baltimore through its subsidiary. TSI therefore sold the assets of Premium Cinema Club to another company. Kalb then left TSI and began working for the company that bought Premium’s assets. In February, 1977, he left that job and took up work in another industry.

He retained his 98 shares of TSI stock, but apparently had no other connection with the company. Vega stayed on as president and chief executive officer of TSI. Although Kalb severed his connection with TSI (other than his stock), he did, from time to time, converse with Vega. In late 1977 or early 1978, Vega “expressed an unhappiness with the contributions that he had been required to make personally to keep T.S.I. afloat.” In February, 1978, Kalb attended a stockholders meeting at which “there was a thorough discussion of the situation.” In May, 1978, Vega indicated a desire to purchase Kalb’s stock.

At the time, the company was in poor financial condition. The only station operating was Baltimore, which was not producing enough revenue to pay expenses. TSI owed Fischer about $450,000, and Fischer was refusing to put any more money into it. Kalb was aware of the situation and believed that TSI’s prospects were dependent upon making the Richmond and Allentown stations profitable.

According to Kalb, Vega confirmed that TSI was in “dreadful condition,” and asserted that “there were no prospects for the Allentown and Richmond stations,” notwithstanding that both had transmitters in place. Vega represented the assets of TSI to be the FCC licenses for Baltimore, Richmond, and Allentown and FCC construction permits for Wilmington, Delaware, and Trenton, New Jersey. Vega told Kalb that there was not enough money in TSI to pay his salary, and that “it was going to require his putting in his own money into the company and he didn’t care to do that unless he owned more of the stock.” ⁶⁶⁰ Upon these representations, said Kalb, he agreed to sell his 98 shares to Vega for $6,000. The final agreement was signed and settled on June 15, 1978.

While Kalb and Vega were negotiating the stock sale, Vega, as president of TSI, was engaged in negotiations with a company known as Satellite Television and Associated Resources (STAR) for the sale of air time in Richmond and ' Allentown. Kalb claimed that he knew nothing about these negotiations with STAR. Just after the stock sale was consummated, TSI signed contracts with STAR for those cities. At about the same time, Kalb discovered through a trade journal that Vega had filed for additional FCC permits in names other than TSI.

In August, 1978, Fischer also discovered these filings and insisted that Vega transfer the permits to TSI. It regarded them as TSI assets. Vega, according to Donald Sommers, Fischer’s liaison with TSI, refused to make the transfer, whereupon Fischer threatened suit. Eventually, in return for Fischer’s agreement to modify Vega’s employment contract and to increase his salary, Vega transferred a number of these licenses' or permits to TSI.

Both Kalb and Sommers testified that the sale of air time in Richmond and Allentown enhanced the value of the company. Sommers stated as well that the transfer of Vega’s individual filings to TSI increased the potential of the company and made it a better company. Kalb stated explicitly that he would not have sold his stock to Vega for $6,000 had he known of the imminent signing of the Richmond and Allentown contracts or the licenses and permits acquired by Vega. Vega continued to run TSI until 1980, when, after a disagreement with Fischer, he sold all of his stock to Fischer and severed his connection with the company.

Between 1978 and 1980, TSI’s condition had improved markedly. According to Mr. Sommers, when Vega left, TSI held permits or licenses, either alone or in partnership with others, in ⁶⁶¹ about twenty cities. Vega received net consideration of $119,000 for his 196 shares. Vega denied doing anything wrong.

He said that he had mentioned the STAR group to Kalb in 1977, that Kalb “had full knowledge of what the assets of TSI were,” and that he (Vega), as a consultant, had prepared many FCC permit applications for other people and had put the money he received for his services into TSI. Vega argues to us that this aspect of the case is controlled by Llewellyn v. Queen City Dairy, 187 Md. 49 , 48 A.2d 322 (1946), and he is not entirely wrong in that argument. When read in proper context, however, Llewellyn does not provide much help to him. Llewellyn came to the Court of Appeals from an order overruling a demurrer; the issue was the legal sufficiency of plaintiffs’ amended bill of complaint for declaratory relief.

The bill, brought by a corporation and two of its stockholders, alleged that two directors of the corporation had entered into “an illegal agreement to secure control of a majority of the stock of the corporation for their benefit,” that the agreement constituted a conspiracy against the corporation, that in furtherance of the agreement the defendant directors took options from a number of the shareholders, and that “in securing these options the defendants made either misstatements or misrepresentations regarding the financial condition of the corporation. . . . ” The action was based on the theory that the directors had fiduciary responsibilities to both the corporation and its stockholders. The Court of Appeals first concluded that the assertions regarding an “illegal agreement” and “misstatements or misrepresentations” were “mere characterizations of the needed facts rather than allegations of them, and cannot be considered.” 187 Md. at 57 , 48 A.2d 322 . It then declared that a corporation had no authority or standing to maintain a suit such as that on behalf of its stockholders. Finally, with respect to the plaintiff stockholders, the