Leavy v. American Federal Savings Bank

ADKINS, Judge. Harry L. Leavy (“Leavy”), appellant, appeals from the trial court’s judgment that he breached his fiduciary duties to American Federal Savings Bank (the “Bank”), appellee. While Leavy was the president and chairman of the Bank’s board of directors, he recruited some of the Bank’s board members and others to make a $6.5 million loan to a troubled ¹⁸⁵ borrower of the Bank, and secretly took a $650,000 loan brokerage fee for doing so. Later, Leavy fraudulently conveyed $450,000 to his son, Christopher Leavy (“Christopher”), placing those funds out of the Bank’s reach.

After a four day bench trial and post-trial briefing, the trial court issued a written memorandum and opinion entering judgment against Leavy in the amount of $650,000, plus prejudgment interest, and judgment against Christopher in the amount of $450,000, plus prejudgment interest. After receiving some payments from Christopher, the Bank released its judgment against him. This appeal is solely on behalf of Leavy. Leavy raises the following issues, which we have rephrased: I. Whether there was substantial evidence to support the trial court’s finding that Leavy breached his fiduciary duties to the Bank.

II

Whether the trial court properly entered separate restitutionary judgments against both Leavy and Christopher. Finding no error and ample evidence that Leavy breached his fiduciary duties to the Bank, we affirm the judgment against him. FACTS AND LEGAL PROCEEDINGS Since 1983, when he founded the Bank’s predecessor-in-interest, Leavy served as the Bank’s president and chairman of its board of directors. By 1989, the Bank had made 10 separate loans totaling $6.6 million to its largest borrower, Eugene N. Hooper.

Federal regulators conducting an examination of the Bank harshly criticized the large concentration of troubled credit in a single borrower. In response, Leavy negotiated with Hooper to restructure the debt. By the end of February 1989, Hooper had agreed to a refinancing plan that required him to reduce the debt by $1.1 million immediately, and by an additional $4 million within one year. The deal included additional security.

Hooper agreed to give the Bank a first deed of trust on Hooper’s ¹⁸⁶ property known as the Cedar Crest Country Club, and a second deed of trust on a shopping center owned by Hooper. The plan also required real estate taxes and insurance on the collateral properties to be escrowed. We shall refer to the debt restructuring and refinancing plan as the “Cedar Crest Loan.” While he was negotiating with the Bank through Leavy, Hooper also was seeking additional credit. By March 1989, Hooper had a $3.3 million loan commitment from another lender.

There was a 10% fee for that loan. But Hooper was not satisfied with the amount of that loan, and continued to look for other financing sources. In pursuit of additional capital, Hooper approached Leavy about brokering a loan that would stand behind the Bank’s loan. At the same time he was negotiating with Leavy about restructuring and reducing the Bank’s loans, Hooper solicited Leavy to help him obtain other financing.

He told Leavy that he would pay a 10% brokering fee for the loan, to be secured by a second deed of trust on the Cedar Crest Country Club property, behind the Bank’s first trust. Although he had never before brokered a loan and was still working on behalf of the Bank to lessen its exposure on the Hooper loans, Leavy agreed. He recruited 20 private lenders to loan Hooper $6.5 million, secured by a second deed of trust on the Cedar Crest property. We shall refer to this loan as the “Second Trust Loan.” Ultimately, Leavy and four members of the Bank’s board of directors participated in their individual capacities as part of the lending consortium for the Second Trust Loan.

Leavy did not disclose that he would earn a 10% brokerage fee to either the participating directors or to anyone else at the Bank. During the time Leavy was simultaneously negotiating the Cedar Crest Loan on behalf of the Bank and the Second Trust Loan on behalf of himself and Hooper, the terms of the Cedar Crest Loan changed, upon Leavy’s recommendations. By June, the immediate $1.1 million pay down, the $4 million pay down after one year, and the escrow account, all of ¹⁸⁷ which Hooper had agreed to in February, were no longer part of the deal. Instead of the total amount of the loan decreasing to $5.5 million (with another $4 million pay down in one year), the loan actually increased to $7.1 million (with no specific pay down provisions).

In addition, Leavy successfully recommended that the Bank release its security interest in a particular piece of Florida property that had served as collateral for one of the Bank loans that was being restructured as part of the Cedar Crest Loan (the “Jupiter Road Property”). On Leavy’s recommendation, made during the time he was simultaneously working on the Cedar Crest Loan and the Second Trust Loan, the Jupiter Road Property was not included in the collateral for the Cedar Crest Loan. Leavy then used the Jupiter Road Property to secure Hooper’s obligation to pay Leavy the $650,000 brokerage fee. Still unaware of Leavy’s brokerage fee for the Second Trust Loan, the Bank’s board approved the Cedar Crest Loan on June 21, 1989, upon Leavy’s recommendation.

At the Bank’s meeting on that loan, Leavy again did not disclose his fee arrangement for the Second Trust Loan, and did not obtain the Bank’s permission to receive the fee for brokering the Second Trust Loan in his personal capacity rather than his corporate capacity. Settlement on both the Cedar Crest Loan and the Second Trust Loan occurred the next day, on June 22, 1989. Because the two loans did not raise enough cash for Hooper to pay Leavy the $650,000 brokerage fee, Hooper executed a $750,000 promissory note to Leavy on the same day (the “Note”). The Note was due in one year, and was secured by the Jupiter Road Property.

Shortly after the Cedar Crest Loan closed, Hooper received more than $1 million as a distribution from his partnership interest in a property known as “Stringfellow Road.” Leavy knew that the Bank had a security interest in the Stringfellow Road proceeds, because the property was collateral for the Cedar Crest Loan. Nevertheless, he allowed Hooper to keep ¹⁸⁸ $200,000 of the funds. Hooper gave $800,000 to Leavy, who put it into an account at the Bank, over which he was the sole trustee. Leavy allowed some of the $800,000 proceeds to be used for purposes other than the payment of principal that Hooper owed to the Bank.

He authorized and directed that some of the Stringfellow Road proceeds be used to make Hooper’s interest payments on the Cedar Crest Loan. In addition, he released $75,000 of the funds directly to Hooper on May 24, 1990. On June 22, 1990, Leavy released another $75,000 to Hooper and First Federal Savings and Loan of the Palm Beaches (“First Federal”). First Federal then loaned Hooper $650,000.

Those funds were immediately used to pay Leavy his $650,000 brokerage fee. The $650,000 check from the title company that handled the First Federal loan for Hooper was issued to Leavy on June 25, 1990, the next business day after Leavy released the $75,000 to First Federal. According to Leavy, he invested the $650,000 in Hooper’s Cedar Crest Country Club. Eventually Hooper defaulted on both the Cedar Crest Loan and the Second Trust Loan.

Leavy did not pursue foreclosure of the Bank’s first deed of trust on the Cedar Crest property. Instead, he allowed the Second Trust Loan group to foreclose on the Cedar Crest Country Club Property. They eventually settled with the Bank. Leavy lost all his investments in both the Second Trust Loan and the Cedar Crest Country Club.

On April 6, 1994, at an emergency meeting of the Bank’s board of directors, Leavy’s criminal defense lawyer disclosed that Leavy had received the $650,000 fee in connection with the Second Trust Loan. At the board’s request, Leavy resigned from the Bank. After Leavy resigned, the Bank asserted a claim against Leavy for the $650,000. One of Leavy’s assets that was considered in discussions regarding that claim was an interest in a limited partnership that owned property on Reisterstown Road.

In early 1996, Leavy’s interest in that property was sold. On March 1, 1996, Leavy conveyed to his son Christopher $450,000 of the proceeds from that sale. ¹⁸⁹ On April 3, 1997, the Bank filed suit against Harry Leavy and Christopher Leavy in Montgomery County Circuit Court. Before trial, the Bank elected to proceed against Harry Leavy solely on its equitable claims. The Bank sought a judgment establishing a constructive trust and/or ordering Leavy to pay restitution for the $650,000 brokerage fee, plus interest from June 25, 1990.

In addition, the Bank proceeded on its fraudulent conveyance claims against Christopher, seeking a judgment in the amount of $450,000 plus prejudgment interest from March 1,1996. After trial, the court issued a written memorandum opinion and order. The court found, inter alia, that Leavy had breached his fiduciary duties to the Bank by obtaining the $650,000 fee for his personal benefit, that Leavy’s transfer of the $450,000 to Christopher was a fraudulent conveyance, and that the Bank was entitled to judgment against Leavy in the amount of $650,000, plus $373,856.85 in prejudgment interest, and to judgment against Christopher in the amount of $450,000, plus $105,423.22 in prejudgment interest. Leavy then filed this appeal.

DISCUSSION I. Motion To Dismiss Preliminarily, we address the Bank’s two motions to dismiss this appeal. When Leavy sought extra time to file his brief in this Court, the Bank opposed that motion and moved to dismiss the appeal. 1 By order dated August 17, 2000, we ¹⁹⁰ allowed Leavy extra time to file his brief—until August 21, 2000. We also denied the Bank’s motion, but without prejudice to its right to seek that relief in its brief. Leavy filed his brief in this Court a week late, on August 28, 2000, without requesting further extension of time, and apparently without consulting the Bank’s counsel regarding either the late filing or the record extract.

The Bank filed a second motion to dismiss the appeal, and renews both motions in its brief. In addition to the unauthorized late filing of the brief, the Bank contends that Leavy “knowingly neglected to make any effort to comply with Rule 8-501(d) [requiring cooperation in the preparation of the record extracts], even after his prior failure to comply with that Rule had been brought to his attention” in the Bank’s first motion to dismiss. The Bank also complains that Leavy’s record extract is materially incomplete, and necessitated the filing of an appendix to the Bank’s brief. It also asserts that Leavy compounded his pattern of failing to serve the Bank with documents by failing to serve a copy of his opposition to the Bank’s second motion to dismiss, despite the claim in the certificate of service that he mailed it on September 13, 2000.

The Bank asks that this appeal be denied or dismissed, or in the alternative, that appellant’s counsel be ordered to pay the costs incurred by the Bank in printing an appendix to its brief and in filing the two motions to dismiss. Leavy opposed the second motion to dismiss, arguing that he filed his brief by mail on August 25th because he did not receive the Court’s order granting the extension until August 21, the date the brief and record extract were due under the extended deadline. Relying solely on “lack of prejudice” as a defense, appellant’s counsel offered no reason for failing to consult with the Bank’s counsel regarding the late filing or the record extract. ¹⁹¹ We agree with the Bank that these actions evidence a pattern of unacceptable disregard for the appellate rules of this Court, in particular, we find the late filing of appellant’s brief and record extract, seven days after the extended deadline established by special permission of this Court, inexcusable. This late filing clearly warrants dismissal of the appeal.

Dismissal of an appeal, however, is a discretionary matter. See Md. Rule 8—502(d), 8-602. In light of our decision in this case, and the evidence that these failures may have resulted from counsel’s actions, we will not exercise that discretion against appellant. Given the avoidable expenses incurred by the Bank as a result of the admitted failures of appellant’s counsel to comply with the appellate rules, however, we will grant the Bank’s request for costs.

Counsel for appellant will reimburse the Bank for the costs of preparing and printing the appendix to its brief, and for the costs of preparing the Bank’s second motion to dismiss. The Bank should submit an appropriate order for such costs, with affidavits and such other evidence as is necessary to establish the reasonableness of such expenses, within 10 days after the filing of this opinion.

II

Merits Of The Appeal A. Standard Of Review In an action tried without a jury, we “will review the case on both the law and the evidence.” Md. Rule 8-131 (c). In doing so, we “give due regard to the opportunity of the trial court to judge the credibility of the witnesses.” Id. Our review is limited to deciding whether there was sufficient evidence to support the trial court’s conclusions. See Gwynn v. Oursler, 122 Md.App. 493, 502 , 712 A.2d 1072 , cert. denied, 351 Md. 662 , 719 A.2d 1262 (1998). “[T]he trial judge may believe or disbelieve, credit or disregard, any evidence introduced, and a reviewing court may not decide on appeal how ¹⁹² much weight must be given as a minimum to each item of evidence.” Loyola Federal Sav.

Bank v. Hill, 114 Md.App. 289, 307 , 689 A.2d 1268 (1997). B. Breach Of Fiduciary Duty Of Loyalty The trial court agreed with the Bank that Leavy had breached his fiduciary duty of loyalty in three respects: (1) using his corporate office and the Bank’s assets for his private gain, rather than for the Bank’s best interest; (2) placing his interests in conflict with the Bank’s interests; and (3) usurping the Bank’s corporate opportunity. On appeal, Leavy argues that the evidence did not support these findings. As set forth below, we find that there was substantial evidence to support the trial court’s finding that Leavy breached his fiduciary duty of loyalty to the Bank by misusing his office and the Bank’s property, and by failing to act in the Bank’s best interests.

Because that finding was sufficient by itself to support the judgment against Leavy, we do not reach the issues raised by Leavy regarding the trial court’s alternative grounds for the judgment. 1. Misuse Of Corporate Office And Corporate Assets Corporate officers and directors are fiduciaries who are under a duty to act for the benefit of the corporation. See Restatement of the Law, Restitution, § 190 cmt. a (1937). For this reason, Maryland courts have long recognized that a corporate officer may not use the corporate office or assets for personal gain.

See Levin v. Levin, 43 Md.App. 380, 390 , 405 A.2d 770 (1979). The purpose of the rule is to prevent fiduciaries from straying from their obligations. See, e.g., Restatement, supra, § 197 cmt. c (rule “rests upon a broad principle of preventing a conflict of opposing interests in the minds of fiduciaries ... ”). ¹⁹³ “Where a fiduciary in violation of his duty to the beneficiary receives ... a bonus or commission or other profit, he holds what he receives upon a constructive trust for the beneficiary.” Id. at § 197. “If the [fiduciary] has made a profit through the violation of a duty to the plaintiff to whom he is in a fiduciary relation, he can be compelled to surrender the profit to the plaintiff, although the profit was not made at the expense of the plaintiff.” Id. at § 160, cmt. d (1932). Courts have awarded restitutionary judgments against bank presidents who receive commissions or other personal profits by violating their duty of loyalty to the bank.

See, e.g., King v. Ballard, 643 S.W.2d 457, 463 (Tex.App.1982), rev’d in part on other grounds, 652 S.W.2d 767 (Tex.1983) (judgment against bank president who received fees for procuring loan); Fleishhacker v. Blum, 109 F.2d 543, 546 (9th Cir.), cert. denied, 311 U.S. 665 , 61 S.Ct. 23 , 85 L.Ed. 427 (1940) (same); Broadway Fed. Sav. & Loan Ass’n v. Howard, 133 Cal.App.2d 382 , 285 P.2d 61, 69 (1955) (judgment against bank president in amount of secret commissions); Blackburn’s Adm’x v. Union Bank & Trust Co., 269 Ky. 699 , 108 S.W.2d 806, 809 (1937) (judgment against bank president in amount of fees charged for mortgage loan transactions); see generally 47 A.L.R.3d 373 (2000) (liability of corporate officer or director for commission or compensation received from third person in connection with that person’s transaction with corporation). “In these situations the [fiduciary] is compelled to surrender the benefit on the ground that he would be unjustly enriched if he were permitted to retain it, even though that enrichment is not at the expense or wholly at the expense of the plaintiff.” Restatement, supra, at § 160 cmt. d; see generally 47 A.L.R.3d 373 , supra (collecting cases). We applied these standards in Levin, supra, where we recognized that a corporate officer’s use of corporate property without the knowledge or approval of the board of directors constitutes a breach of his duty of loyalty. Levin, the president of several family-held corporations, secretly borrowed money from the corporations in order to purchase real property in his own name. We held that this unauthorized use of ¹⁹⁴ corporate property, made possible by Levin’s misuse of his corporate office, violated the fiduciary duty of loyalty.

See Levin, 43 Md.App. at 390-91 , 405 A.2d 770 . In doing so, we summarized the fiduciary standard governing the actions of a corporate officer: “In dealing with corporate assets [the corporate officer] was required to act in the best interests of the corporation and he was prohibited from using either his position or the corporation’s funds for his private gain.” Id. at 390 , 405 A.2d 770 . We held that this disloyal corporate officer was not entitled to retain any benefit obtained as a result of his breach of duty to the corporations. See id.

In this case, the trial court concluded that Leavy misused his corporate office and the Bank’s assets for his private gain, and that he failed to act in the best interests of the Bank. We find ample evidence in the record for this factual finding. The trial court cited multiple ways in which Leavy misused his office and the Bank’s assets. We summarize the trial court’s findings, and the supporting evidence.

First, there was substantial evidence that Leavy misused his corporate office and the Bank’s assets to obtain the opportunity to participate in and broker the Second Trust Loan, to solicit investors for that loan, and to obtain the secret $650,000 brokerage fee. The trial court