Price v. Upper Chesapeake Health Ventures

ZARNOCH, J. In this appeal, we consider whether the Circuit Court for Harford County properly dismissed a purported derivative lawsuit filed on behalf of a Maryland limited liability company (“LLC”) whose rights to do business in Maryland and to use its name were forfeited. On September 20, 2007, Dr. John C. Price and Dr. Alan H. Shikani, appellants, filed a complaint against fellow members of The Surgery Pavilion, LLC (sometimes referred to in this opinion as “the company”) and members of the company’s management committee, alleging that the company and appellants were harmed by the company’s 2004 sale of substantially all of its assets. The complaint asserted one count of breach of fiduciary duty against all of the defendants, and four other counts against particular members of the management committee. The defendants, now appellees, were divided into two groups, each represented by separate counsel.

Each group moved to dismiss the complaint ⁶⁹⁸ on various grounds. Although appellants originally asserted their claims individually and derivatively on behalf of the company, they later conceded that they could not sue in their individual capacity. Consequently, the circuit court was called upon to determine only whether to dismiss appellants’ derivative lawsuit. On October 29, 2008, the court dismissed the suit.

On November 25, 2008, appellants timely noted an appeal. For reasons set forth below, we shall affirm. FACTS AND PROCEDURAL HISTORY In January 2000, Upper Chesapeake Health Ventures, Inc. (“Upper Chesapeake”) and a group of physicians, including appellants, formed The Surgery Pavilion, LLC for the purpose of operating an ambulatory surgical center in Harford County. Pursuant to the company’s “Amended and Restated Operating Agreement,” executed on December 31, 2002, the members appointed a management committee to govern the business and affairs of the company.

At all relevant times, the members of the management committee were Upper Chesapeake, four individuals the complaint labeled as agents of Upper Chesapeake — Stephanie Dinsmore, Robin Luxon, Dr. Peggy Vaughan, and Russel Frank — and three physicians who were also members of the company, Drs. Thomas E. Jordan, David L. Zisow, and Jonathan Seidenberg. The other members of the company, who were not part of its management committee, were appellees Drs. C. Winfred Gehris, Robert Hoofnagle, Seidenberg Protzko Eye Associates, P.A. 1 ; and non-parties Eric P. Suan and Northern Chesapeake Anesthesia Associates.

In September 2004, the management committee approved an agreement to sell substantially all of The Surgery Pavilion’s assets to Upper Chesapeake. The agreement provided that, in consideration of the purchase, Upper Chesapeake would ⁶⁹⁹ pay $936,000 cash, assume the company’s $106,253 debts to third parties, discharge the company’s $629,489 debt to Upper Chesapeake, and terminate Upper Chesapeake’s preferred interest in the company, valued at $2.4 million. The management committee recommended that the company’s members ratify the sale. On September 24, 2004, by a six to four vote, the sale was ratified. 2 Appellants, along with Dr. Suan and Northern Chesapeake Anesthesia Associates, did not consent to the sale.

On October 6, 2006, The Surgery Pavilion’s “right to do business in Maryland and the right to the use of [its] name” were forfeited pursuant to Maryland law because the company failed to file a tangible personal property tax report for tax year 2005. See Maryland Code (1975, 2007 Repl. Vol.), § 4A-911(d) of the Corporations and Associations Article (“C & A”). On September 20, 2007, appellants filed a complaint in the circuit court against all members of the management committee and the members of the company who ratified the sale.

The complaint alleged that the asset sale was “made below fair value.” 3 It claimed that both the management committee and members of the company were not provided with, and failed to request, sufficient information from which they could prudently determine that the sale was in the best interests of the company and its members. It further alleged that Upper Chesapeake and “its agents” concealed certain facts from and falsely represented the company’s value to the other members ⁷⁰⁰ of the company’s management committee and the company’s members. The complaint consisted of five counts. Count one, breach of fiduciary duty, was asserted against all appellees and alleged that the members of the management committee and the members of the company who ratified the sale breached their fiduciary duties to the company and its members.

Counts two through four — fraud, intentional misrepresentation, and intentional concealment, respectively — were asserted against Upper Chesapeake and its agents Luxon, Dinsmore, Vaughan, and Frank. Count five, unjust enrichment, was alleged only against Upper Chesapeake. Each count sought $5 million in compensatory damages, plus interest and costs. In addition, the breach of fiduciary duty claim sought a recision of the sale.

One group of defendants (the “Upper Chesapeake appellees”) included Upper Chesapeake, which was named in all counts, and its “agents,” Luxon, Dinsmore, Vaughan, and Frank, who were named in counts one through four. The other group was comprised of Drs. Jordan, Gehris, Zisow, Hoofnagle, Seidenberg, and Seidenberg Protzko Eye Associates (the “Physician appellees”), against whom only count one — breach of fiduciary duty — was alleged. Each group moved to dismiss, pursuant to Maryland Rule 2-322(b)(2), for failure to state a claim upon which relief could be granted.

Both sets of appellees argued that appellants could not maintain a derivative action on behalf of the company for the following reasons: (1) the company itself lacked power to sue since its rights to do business in Maryland and to use its name were forfeited 4 ; (2) a derivative suit may only be filed by members of the company, and since the company was defunct, ⁷⁰¹ according to appellees, appellants were no longer members; (3) appellants did not satisfy the statutory prerequisite of a derivative suit that they adequately represent the interests of the company’s members, see C & A § 4A-801(c); and (4) prior to filing suit, appellants failed to demand that the management committee bring the action, as required by statute, see C & A § 4A-801(b). All appellees further argued that the breach of fiduciary duty claim should be dismissed because Maryland does not recognize an independent cause of action for breach of fiduciary duty. Finally, all appellees argued that appellants could not sue in their individual capacity because they suffered no personal injury, an assertion appellants conceded. Each set of appellees offered other arguments for dismissal.

The Physician appellees asserted that even if breach of fiduciary duty — the one count filed against them — was a valid cause of action, it should be dismissed because, under the company’s operating agreement, they could be held liable only for actions that were fraudulent or undertaken in bad faith or with gross negligence, and the complaint did not allege any of these elements with respect to them. They further contended that the members who were not on the management committee owed no fiduciary duties to appellants. Finally, they argued that, even if they owed a fiduciary duty to appellants, they justifiably relied on the representations of Upper Chesapeake and its agents and therefore breached no duty. The Upper Chesapeake appellees argued that appellants failed to properly plead the elements of the fraud, intentional misrepresentation, and fraudulent concealment claims.

They also contended that the unjust enrichment claim against Upper Chesapeake could not be maintained because (a) appellants personally did not confer a benefit on Upper Chesapeake; (b) any benefit conferred was governed by an express contract; and (c) the enrichment was not “unjust” because it was consistent with the company’s operating agreement. On October 29, 2008, the circuit court dismissed the suit. In an accompanying Memorandum Opinion, the court explained that it (1) dismissed the breach of fiduciary duty count be ⁷⁰² cause Maryland law does not recognize it as a cause of action; (2) dismissed all counts, holding that appellants could not bring a derivative suit because the company had “ceased to legally exist” and appellants were no longer members of the defunct company; and (3) dismissed the individual claims. Appellants now challenge the first two holdings.

Appellees counter that the court’s reasons for dismissal were correct and argue that there are also alternative grounds for dismissing the case. QUESTIONS PRESENTED We rephrase and reorder appellants’ questions as follows 5 : I. Did the circuit court err when it held that appellants could not maintain a derivative suit on behalf of a limited liability company whose rights to do business in Maryland and use its name were forfeited?

II

Did the circuit court err when it dismissed the count of breach of fiduciary duty? Answering the first question in the negative, we affirm the decision of the circuit court without reaching the second issue. DISCUSSION Standard of Review We review de novo a trial court’s grant of a motion to dismiss. Gasper v. Ruffin Hotel Corp. of Md., Inc., 183 Md.App. 211, 226 , 960 A.2d 1228 (2008).

When reviewing the decision, we “assume the truth of all well-pleaded facts and allegations in the complaint, as well as all inferences that can be reasonably drawn from them,” and we view “all well- ⁷⁰³ pleaded facts and the inferences from those facts in a light most favorable to the plaintiff.” Lloyd v. General Motors Corp., 397 Md. 108, 121-22 , 916 A.2d 257 (2007) (citation and quotations omitted). “Dismissal is proper only if the alleged facts and permissible inferences, so viewed, would, if proven, nonetheless fail to afford relief to the plaintiff.” McNack v. State, 398 Md. 378, 388 , 920 A.2d 1097 (2007) (Citation and quotations omitted.). Status of an LLC Whose Rights Have Been Forfeited Maryland Code (1985, 2007 Repl. Vol.), § 11 — 101(a)(1) of the Tax-Property Article (“TP”) requires a limited liability company to file a tangible personal property report on or before April 15 of each year. C & A § 4A-911(d) provides that an LLC that fails to file the report forfeits its “right to do business in Maryland and the right to the use of the [LLC’s] name ... without proceedings of any kind either at law or in equity.” 6 In the similar context of a corporation, C & A Section 3-503(d) provides that “the charters of ... corporations [that have failed to file an annual tax report] are repealed, annulled, and forfeited, and the powers conferred by law on the corporations are inoperative, null, and void.” In Kroop & Kurland, P.A. v. Lambros, 118 Md.App. 651, 656 , 703 A.2d 1287 (1998), we stated that, “[w]hen a corporation’s charter is forfeited for non-payment of taxes or failure to file an annual report, the ⁷⁰⁴ corporation is dissolved by operation of law and ceases to exist as a legal entity.” In Dual, Inc. v. Lockheed Martin Corp., 383 Md. 151, 163 , 857 A.2d 1095 (2004), the Court of Appeals similarly wrote that “[a] corporation, the charter for which is forfeit, is a legal non-entity; all powers granted to [the corporation] by law, including the power to sue or be sued, were extinguished generally as of and during the forfeiture period.” See also Hill Constr. v. Sunrise Beach, LLC, 180 Md.App. 626 , 952 A.2d 357 (2008) (holding that corporate action taken during a period when a corporation’s charter is forfeited is null and void, and actions taken after its charter has been revived do not relate back to cure the loss of a right divested during the time the charter was forfeited).

In Bayly Crossing, LLC v. Consumer Protection Division, 188 Md.App. 299, 318-19 , 981 A.2d 777 (2009), cert. granted, 412 Md. 255 , 987 A.2d 16 (2010), this Court applied the same analysis to dismiss the appeal of an LLC whose rights to do business and to use its name were forfeited for failure to file tax reports. However, upon close review of the text of the LLC statute and its legislative history, we find that tax-failure forfeiture by an LLC, while resulting in the loss of important rights, does not make the LLC a legal non-entity. 7 In 1992, the General Assembly enacted the Limited Liability Company Act, C & A §§ 4A-101, et seq. See 1992 Md. Laws, Chapter 536. In 1995, the Legislature passed H.B. 871, a departmental bill proposed by the State Department of Assessments and Taxation, which added certain provisions to the Act to become effective on January 1, 1996, including C & A § 4A-911(d).

The purpose of this bill was to “require[] that limited liability companies, limited liability partnerships and limited partnerships forfeit their right to do business in Maryland and the right to the use of their names if they have not paid specified taxes or filed an annual report with the state.” Maryland General Assembly, Department of Fiscal Services, Fiscal Note for H.B. 871 (1995). Although C & A ⁷⁰⁵ § 3-503(d) provides, in the case of a corporation, that “the charters of ... corporations [that failed to file an annual tax report] are repealed, annulled, and forfeited, and the powers conferred by law on the corporations are inoperative, null, and void,” C & A § 4A-911(d) states only that an LLC that fails to file a tax report forfeits “the right to do business in Maryland and the right to the use of [its] name.” The statute does not say that LLC articles of organization, like corporate charters, 8 are forfeited for failure to file tax reports or pay taxes. C & A § 4A-920 also indicates that the LLC does not become nonexistent after it forfeits those rights, providing: The forfeiture of the right to do business in Maryland and the right to the use of the name of the limited liability company under this title does not impair the validity of a contract or act of the limited liability company entered into or done either before or after the forfeiture, or prevent the limited liability company from defending any action, suit, or proceedings in a court of this State. [ 9 ] The legislative history files of H.B. 871 more clearly distinguish the legal consequences for a corporation and an LLC of a failure to pay or file taxes. The Floor Report of the House Economic Matters Committee on H.B. 871 states: House Bill 871 conforms requirements that limited liability COMPANIES, LIMITED LIABILITY PARTNERSHIPS, AND LIMITED PARTNERSHIPS MUST: 1.

Pay their taxes; 2. Pay their unemployment contributions; and 3. File their personal property returns. These requirements currently exist for general corporations.

If they do not comply, the bill has forfeiture provisions THAT TAKE AWAY THE ENTITY’S ABILITY TO DO BUSINESS IN THE STATE. ⁷⁰⁶ (The penalties are not as strict as for a corporation which LOSES ITS CHARTER UNDER CURRENT LAW. FOR THESE ENTITIES, THEIR STATUS AS AN ENTITY REMAINS, THEY JUST CAN’T DO BUSINESS in Maryland.) House Economic Matters Committee Floor Report on H.B. 871, at 2 (1995) (emphasis added). Similarly, the Bill Analysis of the Senate Judicial Proceedings Committee provides: The penalty for noncompliance, i.e., the loss of the right to transact business and loss of the right to use the firm’s name, is not as harsh as that for a corporation. A corporation that fails to comply with comparable requirements loses its charter.

Senate Judicial Proceedings Committee Report, Bill Analysis of H.B. 871, at 2 (1995). 10 Therefore, in this case, because The Surgery Pavilion failed to file a personal property report for tax year 2005, the company’s rights to do business in Maryland and use its name were forfeited on October 6, 2006. 11 However, the company ⁷⁰⁷ still existed as an entity. Consequently, we must determine whether the company possessed the power to file suit after it forfeited its right to do business in Maryland and use its name. While providing that an LLC that failed to file or pay taxes forfeits its rights to do business in Maryland and use its name, C & A § 4A-911(d) does not expressly bar it from filing an action in court — except to the extent filing suit in the name of an LLC falls within the proscription against “doing business” and “using” the LLC name. Related statutory provisions concerning the forfeiture of an LLC’s rights and its ability to regain those rights also do not specifically discuss the authority of a forfeited LLC to file an action in court.

For example, C & A § 4A-919 provides that a person that transacts business in the name of a forfeited LLC knowing that its right to do business is forfeited is guilty of a misdemeanor and subject to a fine. Other sections provide that, after an LLC’s authority to do business is forfeited for failure to pay or file taxes, the company may regain that authority by filing articles of reinstatement and paying and filing all taxes. C & A §§ 4A-915 and 4A-917. Most directly addressing an LLC’s powers after forfeiture is C & A § 4A-920, which is a non-impairment provision or “savings clause” preserving contract validity and litigative defense rights.

This savings clause is unique to Maryland in that we have not discovered a similarly worded statute in any jurisdiction. It is also unique in its operation. On the one hand, the LLC’s rights to do business and to use its name are forfeited. C & A § 4A-911.

On the other hand, C & A § 4A-920 provides that a contract executed or an act performed by the LLC after the C & A § 4A-911 forfeiture is valid, and the ⁷⁰⁸ LLC may defend an action in court. Nevertheless, with respect to court proceedings, the statute expressly provides that a forfeited LLC may only defend an action in court. The negative implication of such language, and the sweep of the “doing business” 12 and name “using” prohibition is that the company may not file or maintain a lawsuit after its rights have been forfeited. As a savings clause or proviso, such statutory language is usually strictly construed. 2A Norman J. Singer, et al., Sutherland Statutory Construction §§ 47.8 and 47.12 (7th ed. 2008).

In addition, a conclusion that filing or maintaining a lawsuit is excluded from the savings clause is not only consistent with these rules of construction, it also harmonizes § 4A-911 with § 4A-920. 13 Finally, we note that under Md. Rule 2-201, “[e]very [court] action shall be prosecuted in the name of the real party in interest[.]” An LLC whose right to use its name has been forfeited for failure to pay or file taxes cannot satisfy this rule and therefore cannot file an action in court. In Bayly Crossing, LLC v. Consumer Protection Division, 188 Md.App. at 304-05 , 981 A.2d 777 , the Consumer Protection Division of the Attorney General’s Office brought a successful administrative action against Bayly Crossing, LLC and other parties that was heard by the Office of Administrative Hearings (“OAH”). After the LLC and its co-parties petitioned for judicial review of the OAH decision, the LLC’s rights to do business and to use its name were forfeited. Id. at 318 , 981 A.2d 777 .

Nevertheless, the circuit court reached the merits and affirmed the agency’s decision. Id. at 315 , 981 A.2d 777 . After the LLC ⁷⁰⁹ and other parties appealed to this Court, we dismissed the LLC as a party to the appeal, holding that it lacked standing to pursue the appeal because “the forfeiture of [its] corporate charter and its failure to file articles of revival render its appeal a nullity.” Id. at 319 , 981 A.2d 777 . 14 We now hold that an LLC whose rights have been forfeited for tax failures still exists as an entity, but may only defend an action in court, not prosecute one. Nevertheless, because the taking of an appeal is comparable to the act of filing suit, the dismissal in Bayly Crossing of the LLC as a party to the appeal was not erroneous.

Derivative Suit on Behalf of Company that Lacked Ability to Sue In Werbowsky v. Collomb, 362 Md. 581, 599 , 766 A.2d 123 (2001) (quoting 13 William Meade Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 5941.10 (1995 Rev. Vol.)) (quotations omitted), the Court of Appeals said that a derivative suit is a “suit by the corporation, asserted by the shareholder on its behalf, against those liable to it. The corporation is the real party in interest and the shareholder is only a nominal plaintiff. The substantive claim belongs to the corporation.” In addition, ordinarily damages recovered in a derivative suit are paid to the corporation. Paskowitz v. Wohlstadter, 151 Md.App. 1, 9 , 822 A.2d 1272 (2003).

See also F. Hodge O’Neal and Robert B. Thompson, Oppression of Minority Shareholders & LLC Members § 7.7(Rev. 2d ed. 2008-09) at § 7.7. C & A § 4A-802 provides that a plaintiff in a derivative action on behalf of an LLC must be “a member at the time the action is brought.” Here, the circuit court dismissed appellants’ suit, holding that they could not sue on behalf of the company because it was a legal non-entity and lacked the power to sue, and because appellants were no longer members of the defunct company. ⁷¹⁰ Because of the savings provision of C & A § 4A-920, we disagree with the circuit court’s conclusion that the company-ceased to exist after the forfeiture. Likewise, the court’s holding that appellants could not bring a derivative action on behalf of the company because they were no longer members is incorrect. Since the LLC continued to exist, albeit with some forfeited rights, its members continued to enjoy membership at the time the action was brought.

Nevertheless, since the LLC could not bring suit, it follows that members of the LLC could not file a derivative suit on its behalf or pursue an appeal of the dismissal of that action. This is so because any recovery in a derivative action could go only to the LLC, see supra, at p. 709, and because the LLC would still be the real party in interest in whose name the suit would be prosecuted, supra, at p. 708. 15 Thus, inclusion of such actions within C & A § 4A-911’s stripping of the LLC’s rights to do business and use its name is consistent with the purpose of the 1995 legislation to penalize tax failures by barring affirmative litigation benefiting the LLC. Appellants however, point to caselaw in other states recognizing an equitable exception to statutes depriving a corporation of the power to sue by allowing shareholders to maintain a derivative action when the directors of the corporation caused the company’s loss of litigative authority, and they ask us to apply this exception here. Because there are no LLC or Maryland cases on point, we will examine appellants’ authorities, focusing on the reported out-of-state cases they cite, as well as other potentially relevant out-of-state cases.

In Independent Investor Protective League v. Time, Inc., 50 N.Y.2d 259 , 428 N.Y.S.2d 671 , 406 N.E.2d 486, 488-89 (1980), the Court of Appeals of New York held that a New York statute authorized a shareholder of a dissolved corporation to bring a derivative suit despite not owning shares in the ⁷¹¹ corporation after its dissolution. The relevant statute provided that “[t]he dissolution of a corporation shall not affect any remedy available to ... [its] shareholders for any right or claim existing ... before such dissolution.” Id. (quotations and citation omitted). See also Snyder v. Pleasant Valley Finishing Co., 756 F.Supp. 725, 730 (S.D.N.Y.1990) (applying the Indep.

Investor Protective