Lerner v. Lerner Corp.

750 A.2d 709 (2000) 131 Md. App. 32 Lawrence E. LERNER v. LERNER CORPORATION, et al. No. 938, Sept. Term, 1999. Court of Special Appeals of Maryland. May 1, 2000. ⁷¹¹ Leonard N. Bebchick, Washington, DC (Douglas M. Bregman, Mark A. Gilday and Bregman, Berbert & Schwartz, Bethesda, on the brief), for Appellant. Albert D. Brault (James M. Brault and Brault, Graham, Scott & Brault, LLC, Rockville, James H. Hulme, Stephanie A. Rigaux and Arent, Fox, Kitner, Plotkin & Kahn, PLLC, Washington, DC, on the brief), for Appellees.

Argued before MURPHY, C.J., and WENNER and EYLER, JJ. ⁷¹⁰ EYLER, Judge. The issues presented by this case arise out of a multi-year dispute between Lawrence E. Lerner, appellant (Lawrence), and Theodore N. Lerner, appellee (Theodore), no strangers to the litigation process. Lawrence and Theodore are brothers who, for many years, were jointly engaged in the business of buying, selling, developing, and managing real estate. Lerner Corporation, another appellee (Lerner Corporation or the Corporation), a subchapter S corporation incorporated under the laws of the State of Maryland, was the primary business entity through which the brothers operated.

Lerner Corporation, a closely held corporation but not a "close corporation" within the meaning of Maryland corporation law, was organized in 1965. It was authorized to issue ninety-five shares of no-par common stock. Theodore acquired seventy shares, and Lawrence acquired twenty-five shares. Theodore was president and one of three directors.

Prior to September 1983, Lawrence was secretary and a director. The brothers' relationship deteriorated, and in September 1983, Theodore caused Lawrence to be removed as an officer and director. Lawrence sued Theodore, Theodore undertook to "freeze-out" Lawrence as a stockholder, and Lawrence brought an action to enjoin the freeze-out. The Court of Appeals affirmed the trial court's entry of a preliminary injunction.

See Lerner v. Lerner, 306 Md. 771 , 511 A.2d 501 (1986). Prior to trial of that case, however, the brothers entered into a settlement agreement dated October 16, 1987 (Settlement Agreement or the Agreement). The Settlement Agreement provided that (1) Theodore would remain the chief operating officer of Lerner Corporation, (2) Lawrence would no longer be involved actively in Lerner Corporation but would continue to receive shareholder distributions, and (3) Theodore would have permission to use the resources of Lerner Corporation to benefit his other financial projects. Disputes arose with respect to implementation of the Settlement Agreement.

See, e.g., Lerner v. Lerner, 101 Md.App. 728 , No. 1914, September Term 1993 (Maryland Court of Special Appeals filed September 30, 1994)(unreported), and Lerner v. Lerner Corp., 122 Md.App. 1 , 711 A.2d 233 (1998). We see no need to repeat in this opinion the matters decided in the prior appeals. This case once again raises issues concerning the meaning and application of the Settlement Agreement, as well as questions of corporate law. Facts Appellant directs us to two paragraphs in the Settlement Agreement as relevant to the issues presented.

Paragraph 5 provides: "LEL [Lawrence] shall continue as a shareholder of Lerner Corp. which itself ⁷¹² shall continue with TNL [Theodore] as a shareholder." Paragraph 10, in pertinent part, grants Lawrence the right to receive a proportionate annual distributive share of income plus a preemptive right to purchase a proportionate share of any subsequent offering of Lerner Corporation's common stock. Lerner Corporation sold stock in late 1995, but Lawrence elected not to purchase additional shares. All the shares were purchased by Theodore, increasing Theodore's interest to 89.9% and decreasing Lawrence's interest to 10.1%. In May 1998, Lerner Corporation again sold stock, at which time Lawrence purchased fourteen shares to maintain his proportionate interest.

Subsequent to that sale, Lerner Corporation gave Lawrence notice of a special shareholders meeting to be held on August 24, 1998. The purpose of the meeting was to consider a proposed amendment to the Corporation's charter. The effect of the amendment was to reclassify and convert each of the Corporation's common shares into 1/68th of a share, a "reverse stock split," which would have the effect of reducing Lawrence's interest to less than one share. The amendment provided that, in lieu of the issuance of fractional shares, Lawrence would be paid the fair value of his stock.

This would eliminate Lawrence as a shareholder and convert his interest to cash. The notice was issued pursuant to authorization by the board of directors at a meeting held on August 11, 1998. On August 21, 1998, Lawrence filed suit in the Circuit Court for Montgomery County, seeking a declaratory judgment, an injunction to prevent the reverse stock split, or, if not enjoined, rescission. The court issued a temporary restraining order to prevent adoption of the amendment, conditioned on posting a $100,000 bond.

Lawrence failed to post adequate security, and the amendment was adopted on August 26, 1998. On January 4 through 6, 1999, the case proceeded to a non-jury trial on appellant's claim for rescission and declaratory relief. On June 11, 1999, the circuit court rendered a decision, ruling in favor of appellees. At trial, Lawrence argued that the reverse stock split was not permissible because Lerner Corporation failed to demonstrate a legitimate business reason and because it violated the terms of the Settlement Agreement.

Appellees responded that there was a legitimate business reason for the reverse stock split, there was no fraud or unfairness, and it was not precluded by the Settlement Agreement. The circuit court ruled that the Settlement Agreement did not address the issue of duration. The court thus implied a reasonable time for its duration, finding that the approximate ten years, ten months time that had elapsed from the inception of the Settlement Agreement to the reverse stock split was a reasonable time. Second, the circuit court stated that the Settlement Agreement did not contemplate the "continued interference" by Lawrence that was found to exist.

Third, the circuit court discussed the legal standard to be applied to judicial review of the reverse stock split and stated that, while the exact standard was unclear, it was either fraud, fairness, or business purpose. The court, after concluding there was no evidence to show fraud or unfairness, found there was a business purpose based on (1) the history of contentious litigation, (2) the likelihood that it would continue, (3) the need to maintain the subchapter S status of the Corporation that had been threatened by Lawrence's efforts, and (4) the need to maintain adequate cash reserves. Consequently, the court denied rescission and held that the charter amendment was not in violation of the Settlement Agreement and that appellees had not breached their legal duties. Issues Presented Appellant frames the issues as follows: 1.

Did the Circuit Court err in terminating the 1987 Settlement Agreement among appellant Lawrence ⁷¹³ and appellees Theodore and the Corporation by creating and imposing a term of eleven years upon all of Lawrence's contractual rights arising thereunder, including, in particular, Lawrence's right to continue as a stockholder and to receive an annual distributive share of income? 2. Did the Circuit Court err in holding that Lawrence's actions lawfully justified and supported the entry of a judicial decree effectively terminating the 1987 Settlement Agreement? 3. Did the Circuit Court err in concluding that the Corporation lawfully had adopted and could implement a 1998 reverse stock split designed to wholly eliminate Lawrence's position as a minority stockholder? Motion to Take Judicial Notice Appellant filed in this Court a motion to take judicial notice, which we shall address prior to addressing the issues set forth above.

First, appellant asks this Court to take judicial notice of (1) an order awarding supplemental judgment dated October 19, 1998, and (2) a notice of judgment, entered October 27, 1998, both by the Circuit Court for Montgomery County in Lerner, et al. v. Lerner Corporation, et al., No. 77954 Civil. The orders relate to proceedings on remand as the result of this Court's unreported opinion in Lerner v. Lerner Corporation, No. 1914, September Term 1994 (filed September 30, 1994). Appellant suggests that notice is required to provide this Court with a full chronology of the dispute among the parties. Second, appellant asks us to take judicial notice of Lerner Corporation's offer to sell stock dated May 18, 1998.

This document was not admitted into evidence. Maryland Rule 5-201 provides that a court may take judicial notice of adjudicative facts. The rule further provides that "[j]udicial notice may be taken at any stage of the proceedings." Md. Rule 5-201(f). As such, an appellate court may take judicial notice.

See generally Joseph F. Murphy, Maryland Evidence Handbook § 1000, at 409 (3rd ed.1999) ("an appellate court may take judicial notice of a fact not judicially noted by the trial judge"); 5 Lynn McLain, Maryland Evidence § 201.1 n.6, at 90 (1987 & Supp.1995) (citing cases in which Maryland appellate courts have taken judicial notice). The doctrine of judicial notice substitutes for formal proof of a fact "when formal proof is clearly unnecessary to enhance the accuracy of the fact-finding process." Smith v. Hearst Corp., 48 Md.App. 135, 136 , 426 A.2d 1 (1981). A court may judicially note facts that readily can be determined by examination of a source whose accuracy cannot be reasonably questioned. Md. Rule 5-201(b).

Included among the categories of things of which judicial notice may be taken are "facts relating to the ... records of the court." Smith, 48 Md.App. at 136 n. 1, 426 A.2d 1 . In McCormick's treatise on evidence, it is said to be "settled, of course, that the courts, trial and appellate, take notice of their own respective records in the present litigation, both as to the matters occurring in the immediate trial, and in previous trials or hearings." McCormick on Evidence § 330, at 766 (2d ed.1972), quoted with approval in Irby v. State, 66 Md.App. 580, 586 , 505 A.2d 552 (1986), cert. denied, 308 Md. 270 , 518 A.2d 732 (1987). Consequently, we take judicial notice of the order and notice of judgment entered by the Circuit Court for Montgomery County in Lerner, et al. v. Lerner Corp., No. 77954 Civil. We decline, however, to take judicial notice of Lerner Corporation's offer to sell stock in that it is not a part of the record, and its accuracy is subject to reasonable dispute and cannot be as readily and accurately ascertained.

Discussion 1. Interpretation of Settlement Agreement Appellant contends that the circuit court erred when it imposed an "eleven-year ⁷¹⁴ term" on the Settlement Agreement. Appellant argues that the Settlement Agreement was lawful and that, pursuant to paragraphs 5 and 10, appellant was entitled to a distributive share for his lifetime or as long as Lerner Corporation exists. Appellees argue that the Agreement is silent as to duration and such a contract not otherwise terminable at will is enforceable for a reasonable time, and what constitutes a reasonable time is a fact question.

Additionally, appellees assert that the restriction in the Settlement Agreement constitutes an unreasonable restraint on alienation, and because appellant is seeking rescission, equity can deny enforcement of a contract when it is unreasonable and enforcement would work a hardship. Appellant responds that a court's ability to impose a reasonable term when a contract is silent is limited to the question of when a party is to render performance. The question, in that situation, is whether the other party is excused from performance or entitled to relief for nonperformance. Appellant argues that the doctrine does not apply because appellant has performed his obligations.

We agree with appellees. Our discussion in Kiley v. First National Bank of Maryland, 102 Md.App. 317 , 649 A.2d 1145 (1994), cert. denied, 338 Md. 116 , 656 A.2d 772 , cert. denied, 516 U.S. 866 , 116 S.Ct. 181 , 133 L.Ed.2d 120 (1995), is instructive here: Depending upon the intention of the parties, a contract, silent as to duration, may contemplate perpetual performance, performance for a reasonable time, or performance until the parties decide otherwise. But Williston and the Restatement (Second) of Contracts agree that, unless expressly provided, promises ordinarily are not interpreted to require perpetual performance. [1 Richard A. Lord, Williston on Contracts ], § 4:19, at 431 [ (4th ed.1990) ]; Restatement (Second) Contracts, § 33, Comment d, at 94 [(1981)]. When courts are required to interpret such imprecise contracts, "some period short of infinity" is usually enforced.

Williston, § 4:19, at 434. "[A]bsent a contrary intention being shown by the circumstances, [courts will] interpret a promise which does not in terms state the time of performance as intending performance in or for a reasonable time." Id. Similarly, if a continuing performance was anticipated, but no specific time provision was stipulated in the contract, "the contract contemplates performance for a reasonable time," and is usually terminable at any time by either party. Id., § 4:19 at 442; Restatement (2d) Contracts, § 33. 102 Md.App. at 335-36 , 649 A.2d 1145 ; see also Goldman, Skeen & Wadler v. Cooper, Beckman & Tuerk, L.L.P., 122 Md.App. 29, 46-47 , 712 A.2d 1 (1998)("In absence of a specific provision, a reasonable duration will be implied.")(citing Evergreen Amusement Corp. v. Milstead, 206 Md. 610, 617 , 112 A.2d 901 (1955)).

The Settlement Agreement at issue did not address duration. Consequently, as a matter of law, it was effective for a reasonable time. See Kiley, 102 Md.App. at 336 , 649 A.2d 1145 ; see also 1 Richard A. Lord, Williston on Contracts § 4:19, at 429-48 (4th ed.1990) (hereinafter "Williston "). Appellant has referred us to cases in other jurisdictions that are either factually inapposite or of little import here.

We briefly distinguish those cases. In Galler v. Galler, 32 Ill.2d 16 , 203 N.E.2d 577, 586 (1964), a shareholder agreement between two brothers having equal interest in a close corporation did not provide for a specific termination date. The express purpose of the agreement was to provide financial support to the stockholders' immediate families upon their death. Id. at 580.

One of the shareholders died. Id. Thereafter, the agreement was challenged and held to be enforceable. Id. at 585-86.

Despite a clause in the agreement stating that its terms "`shall be binding upon and shall inure to the benefits of' the legal ⁷¹⁵ representative, heirs and assigns of the parties," the court reasoned that the purpose of the agreement was accomplished at the death of the survivor of the parties. Id. at 586. No such express purpose exists in the Settlement Agreement in this case. In Glazer v. Glazer, 374 F.2d 390, 404 (5th Cir.1967), cert. denied, 389 U.S. 831 , 88 S.Ct. 100 , 19 L.Ed.2d 90 (1967), the court recognized that, in stockholder agreements, the parties' intention with respect to duration, if not expressly stated, must be construed in light of the whole agreement and should be given a practical construction, looking at it from a point in time prior to existence of the dispute (quoting Hornstein, Corporation Law and Practice § 175, at 209-10 (1959)).

The court recognized that such agreements may be construed as revocable at will or as effective so long as the parties live provided "they remain faithful, etc." Id. There, the court held that the determination with respect to the agreement's duration was one for the jury, and the agreement could properly be construed by the jury to continue for a reasonable time, "possibly until the death or complete retirement of one of the brothers." Id. The court's holding, that the question of whether an agreement is enforceable for a reasonable time is a question of fact, does not advance appellant's argument. In Wasserman v. Rosengarden, 84 Ill.App.3d 713 , 40 Ill.Dec. 430 , 406 N.E.2d 131 (1980), a minority shareholder, who had been ousted as a corporate officer, sued two fellow shareholders and the corporation, seeking an accounting, corporate dissolution, and remuneration for a period subsequent to his termination.

Id. at 714 , 40 Ill.Dec. 430 , 406 N.E.2d 131 . The shareholders' agreement provided that the shareholders would receive equal salaries and share equally in distributed profits for so long as the parties remained shareholders or the corporation remained in existence. Id. at 717 , 40 Ill.Dec. 430 , 406 N.E.2d 131 . In Wasserman , the shareholders' agreement provided a term limiting its duration, whereas the Settlement Agreement in this case omits a durational term.

Moreover, the court in Wasserman did not give consideration to the interpretation or construction of the agreement's duration. Similarly, Compton v. Paul K. Harding Realty Co., 6 Ill.App.3d 488 , 285 N.E.2d 574 (1972), did not involve the issue of duration. Rather, the case stands for the proposition that an agreement without a termination date is not void on the ground of vagueness. Id. at 579 .

Maimon v. Telman, 40 Ill.2d 535 , 240 N.E.2d 652, 655 (1968), held that a joint-venture agreement without a specified duration was terminable at will where the court could not determine when the purpose of the agreement would be accomplished. Marcy v. Markiewicz, 233 Ill.App.3d 801 , 175 Ill.Dec. 37 , 599 N.E.2d 1051 (1992), regarded a reciprocal right of first refusal with respect to the sale of an apartment building contained in a partnership dissolution agreement. There, the court held the right did not violate the rule against perpetuities, inasmuch as it was personal to the holder of the right and his sons. Id. 175 Ill.Dec. 37 , 599 N.E.2d at 1058 .

Appellant further contends that the term limit was imposed in error because the trial court made no finding of ambiguity and considered no evidence regarding the duration of the agreement. First, we note that appellant did testify regarding his understanding of the duration of the agreement. Contrary to appellant's implicit assertion, the trial court was not required to accept appellant's testimony regarding his subjective understanding of the agreement's duration. Second, and more important, in the absence of an express term limit, a court must first interpret the agreement to determine if the agreement unambiguously omitted the term or if a term was present but ambiguous.

We have already determined the court was correct in determining the Settlement Agreement fell into the ⁷¹⁶ first category. The process for supplying a missing term is not the same as the process for making a factual determination to clear up an ambiguous term. The Restatement (Second) of Contracts provides that, when the parties to a contract have not agreed with respect to a term that is essential to a determination of their rights and duties, a term that is reasonable under the circumstances may be supplied by the court. See Restatement (Second) of Contracts § 204 (1981).

The commentary to this provision notes that, while interpretation may be necessary to determine that the parties have not agreed with respect to a particular term, the supplying of an omitted term is not technically within the Restatement's definition of interpretation, which consists only of ascertaining the meaning of a promise or agreement, and not whether omitted terms exist or whether terms should be supplied. See Restatement (Second) of Contracts § 204 comment c (1981)(referring to the definition of interpretation in Restatement (Second) of Contracts § 200 (1981)). The treatise Corbin on Contracts similarly provides that "a situation in which construction, rather than interpretation, occurs is a court's action in filling a gap in the terms of a contract." Margaret N. Kniffin, 5 Corbin on Contracts § 24.3, at 9 (Rev. ed.1998) (hereinafter "Corbin "). When an agreement is silent as to duration, a reasonable duration will be implied by the court.

In determining what constitutes a reasonable duration, reference should be made to the subject matter of the agreement. See Goldman, Skeen, 122 Md.App. at 47, 712 A.2d 1 (citing Pumphrey v. Pelton, 250 Md. 662, 665 , 245 A.2d 301 (1968)); 1 Williston, § 4:19, at 429; Restatement (Second) of Contracts § 204 comment d (1981). The treatises are in accord with respect to this premise. For example, Corbin on Contracts provides that "If a court attempts to determine what meaning a reasonable person would have given to promissory words at the time of formation of the contract, this is largely an effort to produce a result reasonable under the circumstances both at the moment of agreement and subsequently when enforcement is sought." 5 Corbin, § 24.29, at 320 (emphasis added).

In Williston on Contracts, it states that "courts frequently interpret promises requiring continued performance for a reasonable time or until terminated by reasonable notice. In every case of this sort, all the circumstances surrounding the transaction must be considered in reaching an appropriate conclusion." 1 Williston, § 4:19, at 446-47 (footnotes omitted) (emphasis added). We conclude from the above discussion that there is a conceptual difference— more than one of semantics—between the process for construing an ambiguous agreement to determine the intention of the parties and determining a reasonable duration for an agreement when the parties failed to provide for its duration. In the latter case, attempting to determine the intention of the parties and to give such intention efficacy is relevant, but the court may consider all relevant circumstances—including circumstances as of the time of entering into the agreement, events thereafter, and considerations of policy and fairness.

In the instant case, the circuit court considered the totality of the circumstances and concluded as a matter of fact that the period of time that had elapsed before the reverse stock split, just short of eleven years, was a reasonable period of time. We hold that the court's determination was not clearly erroneous. 2. Breach of Settlement Agreement Appellant reads the circuit court opinion as holding in the alternative that the Settlement Agreement was properly terminated because Lawrence committed a material breach of the Agreement by virtue of his "continued interference." Appellant argues that pursuit of litigation by Lawrence was not a breach of the Settlement Agreement ⁷¹⁷ and that Lawrence in fact prevailed on various issues in the prior litigation. Even with respect to issues on which Lawrence did not prevail, according to appellant, the litigation was not meritless.

In light of our disposition of the first issue, we see no need to address this issue. 3. Reverse Stock Split Appellant contends that, even if not barred by the Settlement Agreement, the reverse stock split was unlawful. Appellant assumes that the appropriate test to be applied is whether there was a proper business purpose for the reverse stock split. Appellant argues that there was no valid business purpose because the purpose was to end any further efforts by Lawrence to enforce his contractual rights and to eliminate him as a shareholder.

The reasons for the reverse stock split were set forth in the minutes of the board of directors. The minutes recited that the Settlement Agreement limited Lerner Corporation's ability to retain profits for working capital needs because profits had to be distributed on a current basis. The result was that stock had to be sold to repay loans or finance new purchases and to provide working capital. The minutes also indicated that Lawrence acted to frustrate stock sales and that eliminating him as a stockholder would remove a major obstacle to raising additional capital.

Appellant argues that after the stock offering in May 1998, Lerner Corporation was flush with cash, and the facts did not support the board resolution. Appellant recognizes that the circuit court found that the freeze-out was justified (1) to enable Lerner Corporation to maintain cash reserves, (2) to avoid litigation costs, (3) because dissension was impairing the Corporation's ability to conduct business, and (4) to enable Lerner Corporation to avoid the loss of subchapter S status. Appellant asserts that there is nothing in the record to support those findings. a. Exclusivity of Appraisal Remedy In response, appellees first assert that the Maryland appraisal statute, Md.Code, Corps. & Ass'ns §§ 3-202 to 3-211 (1999), provides the exclusive remedy for a minority shareholder and that traditional forms of equitable relief are not available as a matter of law.

We disagree that the Maryland appraisal statute is the exclusive remedy for a minority shareholder. Nothing in either the existing statute or its predecessors indicates that the remedy of an appraisal proceeding was intended to be exclusive. See Twenty Seven Trust v. Realty Growth Investors, 533 F.Supp. 1028, 1036 (D.Md.1982); Walter J. Schloss Assocs. v. Chesapeake & Ohio Ry. Co., 73 Md.App. 727, 738 , 536 A.2d 147 (1988); see also James J. Hanks, Jr., Maryland Corporation Law, § 10.8, at 342-43 (1990 & Supp.1999).

It is clear that a court may grant injunctive relief under appropriate circumstances. Lerner v. Lerner, 306 Md. 771, 778-82 , 511 A.2d 501 (1986); Homer v. Crown, Cork & Seal Co., 155 Md. 66 , 141 A. 425 (1928) (an injunction can lie when there is fraud); Walter J. Schloss Assocs., 73 Md.App. at 737-44 , 536 A.2d 147 . In our view, the relief available also includes rescission and monetary relief outside of the appraisal remedy. In Walter J. Schloss Assocs., a case-involving a cash out merger, we stated that a remedy other than an appraisal proceeding is only available, however, "under very limited circumstances," involving allegations, and