Pittman v. American Metal Forming Corp.

CHASANOW, Judge. This case involving alleged breaches of fiduciary duties by the sole shareholder of a corporation comes to us from the United States Court of Appeals for the Fourth Circuit, pursuant to the Maryland Uniform Certification of Questions of Law Act, Maryland Code (1974, 1989 RepLVol.), Courts & Judicial Proceedings Article, §§ 12-601 to 12-609 and Maryland Rule 8-305. The certified questions are: ⁵¹⁹ “a. Whether a sole shareholder is liable to his corporation for usurpation of a corporate opportunity when, absent any demonstrated harm to creditors, he purchases property and equipment to be used by the corporation in his own name, and then leases the property and equipment to the corporation. b.

Whether a sole shareholder breaches a fiduciary duty to the corporation when he charges lease prices above fair market value for the property and equipment he leased to his corporation. c. If a breach of fiduciary duty is found, is the statute of limitations tolled by the sole shareholder’s control of the corporation.” This action arises out of a suit instituted by American Metal Forming Corporation (American) and the Trastee in Bankruptcy (Trustee) for Pittcon Industries, Inc. (Pittcon Industries) in the United States Bankruptcy Court for the District of Maryland against W. David Pittman, Jr. (Pittman) and Patrice Kelley Pittman (hereinafter referred to collectively as the Pittmans). American and the Trustee alleged that the Pittmans breached fiduciary duties owed to Pittcon Industries and sought the transfer of legal title to certain properties and equipment from the Pittmans to American. At all pertinent times, Pittman was Pittcon Industries’ sole shareholder and president and also served as one of its directors.

For a brief period of time in the early 1980s, Pittman’s wife, Patrice, also served as a director of Pittcon Industries. 1 In 1980, and again in 1985, the Pittmans purchased properties located in Prince George’s County so that Pittcon Industries could expand its operations. To purchase these properties, Pittman obtained Industrial Revenue Bond (IRB) financing with Prince George’s County as the secured party. Citizens Bank was the assignee on the 1980 purchase ⁵²⁰ and Maryland National Bank was the assignee on the 1985 purchase. Pittman also used the IRB financing to purchase certain equipment for Pittcon Industries’ use.

To secure the loan amounts for the properties and equipment, Pittman pledged all of the assets of Pittcon Industries. The transac-. tions were structured so that the properties and the equipment were titled to the Pittmans and were leased to Pittcon Industries pursuant to a long-term lease arrangement. Pittman structured the transaction in this manner based on advice from his accountant that it would increase the cumulative tax deductions for both Pittman and Pittcon Industries. The structure of the transactions was disclosed to the two banks and to Prince George’s County, which constituted Pittcon Industries’ primary creditors, and was reflected in the IRB documents.

Several years after the last real property purchase, an unrelated lawsuit was filed against Pittcon Industries and a one million dollar judgment was entered against it. As a result of the judgment, Pittcon Industries filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Maryland. After the bankruptcy filing, Francis Hunt was appointed by court order to replace Pittman as CEO of Pittcon Industries. In March of 1990, after approval by the bankruptcy court, American bought all of Pittcon Industries’ assets.

On May 25, 1990, American filed suit against the Pittmans in the bankruptcy court alleging, inter alia, that the Pittmans breached a fiduciary duty owed to Pittcon Industries by purchasing the properties and equipment in the Pittmans’ names and leasing the properties and equipment back to the corporation at above fair market rates. American sought the imposition of a constructive trust and the transfer to American of legal title in the properties and equipment that were purchased with the IRB funds. American also sought damages for the amount Pittcon Industries paid on the leases in excess of fair market value. On July 20, 1990, the Trustee filed a motion to intervene as a plaintiff in the suit against the Pittmans.

On that same day, the Trustee ⁵²¹ also filed a complaint against the Pittmans which was virtually identical to American’s complaint. Pursuant to a Report and Recommendation of the bankruptcy judge requesting that the adversary proceeding be withdrawn from the bankruptcy court, the case was referred to the United States District Court for the District of Maryland. In a non-jury trial the district court, (Hargrove, J.), held that Pittman breached a fiduciary duty owed to Pittcon Industries by usurping a corporate opportunity when he purchased the properties and equipment and then leased the properties and equipment to Pittcon Industries. See American Metal Forming Corp. v. Pittman, 135 B.R. 782 (Bankr.D.Md.1992).

The district court entered an order granting American and the Trustee a constructive trust on the properties and equipment and ordered that legal title to the properties and equipment financed with the IRB funds be transferred to American. The court summarized its holding by stating that: “Pittman breached his fiduciary duty by engaging in both the IRB transactions and the subsequent lease agreements for his own personal benefit and to the detriment of Pittcon. The purchase of the properties and equipment were clearly corporate opportunities which Pittcon could have purchased on its own under the same favorable terms Pittman obtained for himself. Pittman came across those opportunities as President of Pittcon, and usurped the corporate opportunities for himself.

He also breached his fiduciary duty to Pittcon when he caused Pittcon to enter into leases with himself at above the market rate on the [1985] property....” American Metal Forming Corp., 135 B.R. at 786 . Subsequent to its decision, the district court referred the matter to a magistrate judge who assessed damages in the amount of $1,170,429.00 for the lease payments Pittcon Industries paid to Pittman in excess of fair market value. In a Final Judgment Order, the district judge adopted the magistrate judge’s Report and Recommendation in full. ⁵²² On December 14, 1992, the Pittmans filed an appeal from the Final Judgment Order to the United States Court of Appeals for the Fourth Circuit. Prior to considering the case, the Fourth Circuit certified three questions of law to this Court.

We will address each certified question in turn. Question I. WHETHER A SOLE SHAREHOLDER IS LIABLE TO HIS CORPORATION FOR USURPATION OF A CORPORATE OPPORTUNITY WHEN, ABSENT ANY DEMONSTRATED HARM TO CREDITORS, HE PURCHASES PROPERTY AND EQUIPMENT TO BE USED BY THE CORPORATION IN HIS OWN NAME, AND THEN LEASES THE PROPERTY AND EQUIPMENT TO THE CORPORATION. For the reasons discussed below, we hold that a sole shareholder is not liable for the usurpation of a corporate opportunity when, in his own name, he purchases property and equipment for the corporation’s use so long as no creditors are harmed. Maryland has long held that directors and officers of a corporation stand in a fiduciary relationship to their corporation.

See Merchants Mortgage Co. v. Lubow, 275 Md. 208, 215 , 339 A.2d 664, 669 (1975)(discussing the fiduciary duty of officers and-directors); Waller v. Waller, 187 Md. 185, 194 , 49 A.2d 449, 454 (1946)(discussing the fiduciary duty of directors); see also Roger A. Clapp, A Fiduciary’s Duty of Loyalty, 3 Md.L.Rev. 221, 221 (1939). This Court “has ... recognized as a corollary, to the law of a corporate officer’s and director’s fiduciary duty, that, when presented with a business opportunity to fulfill a corporate purpose, [the director or officer] should take advantage of it, not for himself, but for the corporation.” Faraclas v. City Vending Co., 232 Md. 457, 463-64 , 194 A.2d 298, 301 (1963); see also Indurated Concrete Corp. v. Abbott, 195 Md. 496, 503 , 74 A.2d 17, 20 (1950)(noting that directors and officers must not “ ‘use their positions to advance their own individual interest as distinguished from ⁵²³ that of the corporation’ ”) (quoting Cumb. Coal & Iron Co. v. Parish, 42 Md. 598, 605-06 (1875)); 3 William M. Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 861.10, at 284 (perm. ed. rev. vol. 1994)(noting that the corporate opportunity doctrine generally prohibits “one who occupies a fiduciary relationship to a corporation from acquiring, in opposition to the corporation, property in which the corporation has an interest or tangible expectancy or which is essential to its existence”). The Supreme Court of Delaware explained the corporate opportunity doctrine in the oft-cited case of Guth v. Loft, Inc., 23 Del.Ch. 255 , 5 A.2d 503 (1939), as follows: “[I]f there is presented to a corporate officer or director a business opportunity which the corporation is financially able to undertake, [and] is, from its nature, in the line of the corporation’s business and is of practical advantage to it, is one in which the corporation has an interest or a reasonable expectancy, and, by embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation, the law will not permit him to seize the opportunity for himself.

And, if, in such circumstances, the interests of the corporation are betrayed, the corporation may elect to claim all of the benefits of the transaction for itself, and the law will impress a trust in favor of the corporation upon the property, interests and profits so acquired.” 5 A.2d at 511 . In addition, it has been suggested that “while [the] law on corporate opportunity has developed around the duty owed by directors and officers, ... comparable duties and standards should be imposed when the party whose conduct is in question is a stockholder.” David J. Greene & Co. v. Dunhill International, Inc., 249 A.2d 427, 434 (Del.Ch.1968). This Court has “recognized the fiduciary obligation of majority shareholders, in certain matters, to minority shareholders.” Toner v. Baltimore Envelope Co., 304 Md. 256, 269 , 498 A.2d 642, 647 (1985). We have held that “when majority stockholders use their voting power for their own benefit, for some ⁵²⁴ ulterior purpose adverse to the interests of the corporation and its stockholders ..., they thereby become fiduciaries and violate their fiduciary obligations.” Cooperative Milk Service v. Hepner, 198 Md. 104, 114 , 81 A.2d 219, 224 (1951); see Baker v. Standard Lime & Stone Co., 203 Md. 270, 283-84 , 100 A.2d 822, 829 (1953).

In Allied Chemical & Dye Corporation v. Steel & Tube Co., 14 Del.Ch. 1 , 120 A. 486 (1923), the Delaware Court of Chancery explained why majority shareholders who exercise control over a corporation owe a fiduciary duty to minority shareholders: “When ... a majority of the voting power in the corporation join hands in imposing its policy upon all, it is beyond all reason ... to take any view other than that they are to be regarded as having placed upon themselves the same sort of fiduciary character which the law impresses upon the directors in their relation to all the stockholders.” 120 A. at 491 ; see also Greene, 249 A.2d at 435 (concluding that the rule prohibiting directors and officers from usurping corporate opportunities also prohibited a majority shareholder acting as a result of his control over a corporate function from usurping a corporate opportunity). Although in certain circumstances majority shareholders may owe fiduciary duties to minority shareholders of the corporation, this Court has stated that a shareholder does not owe a general fiduciary obligation to his corporation. Morrison v. Savage, 56 Md. 142, 144 (1881) (noting that although stockholders cannot withhold stock from the reach of creditors that have lawful claims against the corporation, “it by no means follows that [stockholders] are to be regarded as fiduciaries”). The cases in which this Court has recognized a fiduciary duty owed by majority shareholders have been primarily in the context- of a duty owed to minority shareholders.

In the instant case, however, there are no minority shareholders that have been or could be injured and no creditors were prejudiced by the transactions at issue. To answer this certified question, we must determine whether Pittman, as sole shareholder of Pittcon Industries, can be liable for usurping a corporate opportunity properly belonging to Pittcon Industries ⁵²⁵ when no minority shareholders and no creditors were harmed by Pittman’s actions. We hold that when, in circumstances such as the instant case, all of the shareholders participated in the transaction and no creditors were injured, there is no liability for the usurpation of a corporate opportunity. In a case factually similar to the instant case, the United States Court of Appeals for the First Circuit refused to apply the corporate opportunity doctrine to a transaction between the corporation and the sole shareholder/president of the corporation.

See In re Tufts Electronics, Inc., 746 F.2d 915 (1st Cir.1984). In Tufts, the sole shareholder and president of Tufts Electronics, Inc. (Tufts) borrowed money to purchase investment property in New Hampshire where he could locate his corporation at reduced leasing costs. After purchasing the property in his own name, the sole shareholder/president leased the property to Tufts. Five hundred dollars of the lease payment was profit to the sole shareholder/president and the rest was used to meet the mortgage payments on the property.

Tufts paid the taxes, utilities, insurance and maintenance of the premises. Subsequently, Tufts filed a petition for voluntary bankruptcy protection under Chapter 7 of the Bankruptcy Code. After the bankruptcy petition was filed, the Trustee in bankruptcy filed a complaint seeking the imposition of a constructive trust on the property because the sole shareholder/president bought and maintained the property with corporate funds. 746 F.2d at 916-17 . The bankruptcy court, after determining that the sole shareholder/president usurped a corporate opportunity, imposed a constructive trust on the property.

The district court affirmed the bankruptcy court’s judgment but the First Circuit reversed the judgment. 746 F.2d at 917-18 . In reversing the district court, the First Circuit held that: “the corporate opportunity doctrine is a rule of disclosure ... [and] application of the [corporate opportunity doctrine] is inapposite where an action [by a sole shareholder] necessarily involves the knowledge and assent of the corporation [because the sole shareholder/president] cannot be accused ⁵²⁶ of defrauding or concealing information from himself in his role as sole corporate [officer and] director.” Tufts, 746 F.2d at 917 (citations omitted); see also In re Gordon Car & Truck Rental, Inc., 65 B.R. 371, 376 (Bankr. N.D.N.Y.1986), aff'd on other grounds, 80 B.R. 12 (N.D.N.Y. 1987) (holding the corporate opportunity doctrine inapplicable because “[e]ven assuming that acquisition of the ... licenses was an opportunity properly belonging to [the corporation], the [three sole shareholders] cannot be accused of withholding or concealing information from themselves as sole shareholders and officers of the [corporation]”) (emphasis in original). The First Circuit in Tufts acknowledged that the sole shareholder/president and the corporation were two separate entities, but held that “absent some element of defrauding, [the sole shareholder/president] was not obliged, in every action he took, to prefer the corporation’s interests to his own.

No one could operate a corporation solely on such a basis ... [the sole shareholder/president’s] behavior was entirely proper for the sole shareholder of a close corporation.” Tufts, 746 F.2d at 917 . Thus, the court