Residential Warranty Corp. v. Bancroft Homes Greenspring Valley, Inc.

DAVIS, Judge. In 1995, the Council of Unit Owners of the Club at McDo-nogh Township (the Council) sued ten defendants, including appellant Residential Warranty Corporation, Incorporated and appellees, Bancroft Homes of Greenspring Valley, Incorporated (BHGV), and James Rubenstein and Terry Meyerhoff Rubenstein (the Rubensteins). The Council filed a fifty-two-count amended complaint in the Circuit Court for Baltimore County alleging that, among others, appellees were responsible for a variety of design and construction defects created during and after the construction of the Council’s condominium units. The amended complaint also claimed that appellant was similarly liable, pursuant to residential warranties it issued on individual condominium units.

On October 2, 1996, ²⁹⁸ appellant filed an amended cross-claim 1 against the parties who developed and built the property at issue, appellees and Bancroft Homes, Incorporated (BHI), for fraudulent conveyance, concealment, and indemnification based on a breach of contract. 2 Between October 15,1996 and February 24,1997, the circuit court (Byrnes, J.) held hearings on various motions and disposed of forty-five of the Council’s counts, leaving seven counts for trial. 3 In addition, the court issued an order on February 27, 1997, severing appellant’s cross-claims for indemnity from the Council’s suit. The following day, the parties proposed on the record a $4,200,000 settlement, subject to final approval by the Council, in which $625,000 would be paid by appellant and $8,575,000 would be paid by the remaining defendants, appellees. After discussion of the settlement proposal, the Rubensteins made an oral motion for summary judgment with respect to the cross-claim filed against them personally by appellant. The court orally granted the Rubensteins’ motion that day, February 28, 1997.

Shortly thereafter, the parties completed the settlement and the remaining counts of the Council’s amended complaint were dismissed. Appellant, on March 7, 1997, filed a motion for the court to reconsider its grant of the Rubensteins’ motion for summary judgment. On the same date, appellant also filed a second amended cross-claim that clarified its previous claims, separately alleged a piercing the corporate veil claim, and added a claim under the Consumer Protection Act. In response, the Rubensteins filed a motion to strike appellant’s second amended cross-claim as untimely and prejudicial.

The court held a ²⁹⁹ hearing on May 22, 1997, during which it denied appellant’s motion for reconsideration and granted BHGV’s motion for summary judgment with respect to appellant’s cross-claims and amended cross-claims. 4 Furthermore, the court granted appellees’ motion to strike the second amended cross-claim because the claim did not add any new counts except for that relating to the Consumer Protection Act, which the court determined was inapplicable. On April 14, 1998, the court denied BHI’s motion for summary judgment, thereby allowing appellant to proceed with its indemnification claim against BHI. The court also entered final judgment on that date, thereby granting summary judgment to both the Rubensteins personally and to BHGV with respect to appellant’s cross-claim and amended cross-claim. Appellant timely noted its appeal on May 11, 1998 and presents for our review the following questions that we rephrase: I. Did the circuit court err by determining that the Rubensteins could not be jointly and severally liable with BHI on either the piercing the corporate veil or fraudulent conveyance theory and, therefore, granting summary judgment in favor of the Rubensteins?

II

Did the circuit err, because appellant was entitled to seek contractual indemnification from BHGV, by granting summary judgment to appellee BHGV?

III

Did the circuit court err by granting appellees’ motion to strike appellant’s second amended cross-claim? The Rubensteins present an additional question for our consideration, which we restate for clarity: ³⁰⁰ We answer appellant’s questions in the negative and the Rubenstein’s additional question in the negative. Consequently, we affirm the circuit court’s judgment. ²⁹⁹ IV. Did the circuit court correctly enter summary judgment in favor of appellees on all counts of the amended cross-claim because appellant did not prove the condition precedent that BHI failed to perform its obligations under the warranty agreements? ³⁰⁰ FACTS Dr. James Rubenstein was the president and sole shareholder of BHI, a real estate development company and umbrella organization for other entities. 5 Dr. Rubenstein was the sole shareholder and president of all affiliated Bancroft entities, with the exception of BHGV, for which he shared officer duties 6 with his wife, Terry, who also maintained ten percent of the company’s stock.

During each year from 1984-1987, appellant entered into one-year building agreements with BHI, providing it with limited warranty agreements on all dwellings constructed. In exchange for the warranties, BHI agreed to construct homes within appellant’s warranty standards and approved building codes, to perform warranty repairs upon notice from the purchaser without appellant’s intervention, and to indemnify appellant for all expenses incurred by appellant resulting from major structural defects occurring during the first two years of warranty coverage. Appellees contracted to build The Club at MeDonogh Township (Club), a condominium complex consisting of eight buildings, each with four stories and multiple residential units. 7 In accordance with the agreements between BHI and appellant, ³⁰¹ the sale of each condominium unit within the Club included a limited warranty. The first unit was sold on October 17,1986, at which time the first warranty agreement for a Club unit went into effect.

Meanwhile, just prior to the sale of the first unit, Elizabeth Hobby was hired by appellees and BHI as the director of architecture. Beginning in late 1986 and continuing into 1987, when the buildings were at various stages of completion, appellees learned of problems with the stucco finish used on the buildings. This observation led to the discovery of more serious problems. 8 In February 1997, Hobby, along with the project superintendent, Drayton Harrison, and the sales representative for the stucco manufacturer, Bill Feiss, made inspections which revealed structural technique problems resulting from a lack of consistency in the job specifications. At a BHI meeting on April 2,1987, Dan Calistrat, an employee of a structural engineering firm hired to review the architect’s plans and existing buildings, reported on the Club’s status.

Notes from the meeting state the following: Structural problems can be corrected in new construction more easily but will be more difficult with existing structures. [Harrison] had his suspicions about the buildings being of sound construction from the [outset]. Upon Mr. Calistrat’s review of the shop drawings ... it was discovered that there was no consistency in specifications and applications. Furthermore, on May 1, 1987, Hobby conducted another field inspection, noting several defects, which was followed by a May 8, 1987 memorandum to Dr. Rubenstein encouraging “diligent bidding” to remedy the problems rather than “contin ³⁰² ued downgrading of details which have been worked out to be the most price-effective remedy possible for a bad situation.” On June 25, 1987, appellees held “Progress Meeting # 6” to discuss the status of new construction and repairs on the Club. The minutes from that meeting include the concern that “[l]ack of attendance shows lack of concern, and even though to some this has become a laughing matter the-progress meeting will continue with those ... who care to resolve the many (nightmares) on the construction of [the Club].” 9 Despite the ongoing discovery of structural defects throughout the summer of 1987, appellees and BHI continued with construction and sales of units at the Club.

By the end of 1987, titles to units in each of the eight buildings had been sold, and completion of construction on the buildings hid many of the structural problems. Construction loan proceeds from the Club and other Bancroft projects were deposited into a single Signet Bank account under the name of BHI. Similarly, all withdrawal requests relating to BHGV’s loan for the Club’s construction were disbursed by Signet into the BHI account. From 1986 to 1987, however, transfers totaling over $650,000 were transferred, 10 at the direction of either Dr. or Mrs. Rubenstein, from the BHI account into Dr. Rubenstein’s personal account. 11 During his 1996 deposition, Dr. Rubenstein could not explain the reason for the transfers, even though he and his wife were the only people with authority to transfer the money. ³⁰³ By 1988, following the transfer of BHI funds to Dr. Ruben-stein, BHI was near insolvency.

On February 24, 1988, William Wolf, chairman of the Council’s Maintenance Committee, wrote a letter to appellant requesting a meeting regarding the extensive construction problems and warranty work which needed to be completed. The letter recognized the “questions among [Club] residents as to the financial condition of [BHI],” and warned that the residents would possibly look to appellant for performance of the repairs. In addition, on March 28, 1988, Baltimore County Attorney Arnold Jablon wrote BHI’s general counsel, pointing out the residents’ complaints and BHI’s failure to demonstrate a good faith effort to remedy the problem. Jablon also observed BHI’s financial problems, stating that, “[although the county certainly understands the financial reality of [BHI’s] situation, the failure to comply with the orders issued by the County cannot be accepted.” In a letter to all Club unit owners, dated April 4, 1988, appellee BHGV admitted its financial difficulties and informed the owners that it would be laying off its construction staff indefinitely and closing the sales office.

The following day, Signet Bank wrote BHGV a letter informing BHGV that it was in default on its obligations to Signet. After discovering that approximately three and one-half million dollars in construction loan proceeds were unaccounted for, Signet commenced foreclosure proceedings against BHGV. 12 Nevertheless, BHI continued to issue to Dr. Rubenstein checks indicating that they were for loan payments, even though Dr. Rubenstein could not recollect the amount of money BHI owed him. On July 14, 1988, William Noonan, III, on behalf of appellant, wrote Dr. Rubenstein and advised him of the homeowners’ multiple complaints. Noonan explained that no additional extensions for either repairs or work completion would be granted and that Dr. Rubenstein needed to submit a ³⁰⁴ proposal for solving the problems.

In correspondence to Noonan on November 11, 1988, Dr. Rubenstein stated that “[a]ll code violations and major exterior problems have either been repaired or are being actively worked on.” On May 2, 1989, Dr. Rubenstein made a similar representation to the Baltimore County Department of Permits and Licenses, stating that of the 130 warranty complaints, only four had not received service. Despite Dr. Rubenstein’s representations, the 1991 report of a structural engineering firm, Donald Simmons Associates, hired by Club homeowners, concluded that substantial design defects existed but had been covered up during completion of the units. On June 17,1992, a report of the Baltimore County Department of Permits and Licenses observed that structural damage represented a serious danger to the residents. Appellant, on October 9, 1992, included the following in correspondence with the Rubensteins: Not only does it appear that the buildings do not meet the building code, but the buildings were not constructed in conformity with [appellant’s] warranty standards and/or accepted industry standards---- It is the position of [appellant] that the agreement ... has been seriously violated by Bancroft Homes---- Therefore, [appellant] will hold Bancroft Homes responsible for any defects and claims which may ultimately be determined as being within the terms of the Limited Warranty Agreement.

Thereafter, the Club’s homeowners filed suit and the litigation which is the basis of this appeal began. DISCUSSION I Appellant first argues that the circuit court erred by determining that the Rubensteins could not be jointly and severally liable with BHI on either the piercing the corporate veil or fraudulent conveyance theory and by granting summary judgment in favor of appellee Rubensteins. Before addressing the merits of appellant’s argument, we shall discuss briefly the ³⁰⁵ standard for review of the grant of a motion for summary judgment. A trial court, in deciding whether to grant a motion for summary judgment, is limited to ruling as a matter of law and does not resolve factual disputes.

See Sheets v. Brethren Mut. Ins. Co., 342 Md. 634, 638 , 679 A.2d 540 (1996). A proper grant of summary judgment requires the court to determine that there is no genuine dispute of material fact and that one party is entitled to judgment as a matter of law.

See Ritter v. Ritter, 114 Md.App. 99, 103 , 689 A.2d 101 (citations omitted), cert. denied, 346 Md. 240 , 695 A.2d 1229 (1997). In addition, the court must “view all facts, and the possible inferences from the facts, in the light most favorable to the party opposing the motion.” Id. at 103-04, 689 A.2d 101 . Thus, in reviewing a grant of summary judgment, we must determine whether the trial court was legally correct. See Goodwich v. Sinai Hosp. of Baltimore, Inc., 343 Md. 185, 204 , 680 A.2d 1067 (1996).

Appellant entered into its contractual agreement with BHI, not with either the Rubensteins or BHGV. Therefore, once the trial court severed appellant’s indemnity claim against BHI from the suit filed by the Council, appellant’s only means of recovery within the original suit was on the fraud-based cross-claims. The court explained during the May 22, 1997 hearing: I have already ruled in this case that the, for better or for worse, that the corporations were viable corporations. I’m not changing that.

I’m not going to permit a piercing of the corporate veil under these circumstances. So I guess in essence what I’m doing is granting Mr. Rubenstein’s motion to dismiss but denying it at this time insofar as the two corporations are concerned. Later, the court clarified its intent: But under the pleadings as I have them here, there is not sufficient evidence that BHGY and/or the the [sic] [Ruben-steins], and I quote, used the corporation for purposes of perpetrating a fraud upon the [p]laintiffs and [appellant]. ³⁰⁶ The Rubensteins, which is what is alleged in this eross[-]elaim, that they used the money to commit some fraud upon them, and I don’t think there is sufficient evidence to find that. And the rest of it has to do with their failure to do what they promised in the agreement [with appellant]---- I don’t know whether they did that or not, but you certainly can go out and get them.

If BHI wants to bring in BHGV, let them, but your redress it seems to me is against BHI. So that being said, ... I’m going to deny reconsideration as far as the Rubensteins are concerned____ Now, if you want to sue [BHI] for these other reasons, you go right ahead. It is from this grant of summary judgment that appellant appeals.

A Appellant contends that the court was presented with ample evidence to raise a jury question for piercing the corporate veil. The standard for piercing the corporate veil is as follows: [T]he most frequently enunciated rule in Maryland is that although the courts will, in a proper case, disregard the corporate entity and deal with substance rather than form, as though a corporation did not exist, [citation omitted], shareholders generally are not held individually liable for debts or obligations of a corporation except where it is necessary to prevent fraud or enforce a paramount equity. Bart Arconti & Sons, Inc. v. Ames-Ennis, Inc., 275 Md. 295, 310 , 340 A.2d 225 (1975). Thus, a Maryland court may pierce ³⁰⁷ the corporate veil only based on fraud or proof that it is necessary to enforce a paramount equity.

The rule regarding paramount equities is that, when substantial ownership of all the stock of a corporation in a single individual is combined with other factors clearly supporting disregard of the corporate fiction on grounds of fundamental equity and fairness, courts have experienced “little difficulty” and have shown no hesitancy in applying what is described as the “alter ego” or “instrumentality” theory in order to cast aside the corporate shield and to fasten liability on the individual stockholder. Travel Committee, Inc. v. Pan American World Airways, Inc., 91 Md.App. 123, 158-59 , 603 A.2d 1301 (1992) (quoting DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 685 (4th Cir.1976)). The factors used in analyzing whether a paramount equity should be enforced include, inter alia, “whether the corporation was grossly undercapital-ized, ... the dominant stockholder’s siphoning of corporate funds, ... the absence of corporate records, and the corporation’s status as a facade for the stockholders’ operations.” Id. at 159, 603 A.2d 1301 (quoting DeWitt, 540 F.2d at 686-87 ). Despite the proclamation that a court may pierce the corporate veil'to enforce a paramount equity, arguments that have urged a piercing of the veil “for reasons other than fraud” have failed in Maryland courts.

See id. at 156, 603 A.2d 1301 . This Court observed that, “[n]otwithstanding its hint that enforcing a paramount equity might suffice as a reason for piercing the corporate veil, the Court of Appeals to date has not elaborated upon the meaning of this phrase or applied it in any case of which we are aware.” Id. at 158 , 603 A.2d 1301 . 13 ³⁰⁸ Appellant, however, argues that the factors necessary to pierce the corporate veil are demonstrated by the record. According to appellant, Dr. Rubenstein intentionally and secretly impoverished BHI while covering up multiple major structural flaws within the Club’s units. The facts, alleges appellant, give rise to the inference that Dr. Rubenstein siphoned BHI’s funds to prevent BHI both from making proper repairs required under the warranty agreement and from indemnifying appellant for the expenses it incurred due to BHI’s failure to construct and repair the Club properly.

The Rubensteins, on the other hand, argue that they made substantial loans to the corporation and that BHI, in turn, routinely made distributions to them. The couple calls it “unremarkable” that Dr. Rubenstein lacks specific recollection of nearly one million dollars in transactions between him and BHI from 1986 to 1988 and asserts that the facts do not rise to the level of fraud. The Rubensteins also aver that BHI was a viable corporation with total sales over fifty million dollars, a large payroll, a number of substantial real estate projects, and hundreds or thousands of contracts with suppliers or customers during the time applicable to this appeal. Essentially, the Rubensteins argue that appellant was unable to meet its burden of presenting clear and convincing evidence, see Dixon v. Process Corp., 38 Md.App. 644, 656 , 382 A.2d 893 (1978), either that they perpetrated common law fraud or that appellant had been affected by the alleged fraudulent acts.

According to the Rubensteins, they have met their obligations concerning the Club’s construction via the settlement with the Council, and appellant may seek indemnity through its separate suit against BHI based on their contractual relationship. Appellant relies heavily on a First Circuit case, Crane v. Green & Freedman Baking Co., 134 F.3d 17 (1st Cir.1998), wherein a corporation that was required to make contributions to an employee health and insurance fund experienced financial problems and ceased making the contributions, instead transferring all remaining assets to a successor entity. The fund manager sued the corporation’s two principals and, after ³⁰⁹ evidence was presented to a jury, the court entered judgment as a matter of law in favor of the defendants. See id. at 19 .

On appeal, the First Circuit observed that the principal and his wife caused the corporation to issue checks to themselves and their relatives during a time in which the corporation was known to be failing and expected to default. See id. at 23 . Furthermore, the court indicated that the principal first explained that the checks were repayments for an unrecorded loan before later stating that he actually could not remember the purpose of the payments. See id. at 24 .

Viewing the evidence in a light most favorable to the fund manager, the court determined that “the evidence was sufficient to support a jury determination that the [principals] had used' corporate funds for personal purposes at times when they knew either that the company was inadequately capitalized to meet its obligations, or that, in fact, it had stopped doing so----” Id. Thus, the First Circuit reversed the district court and remanded the case because the evidence was more than de minimis and a jury could have found that the principals acted fraudulently. See id. at 25 . Appellant also relies on a Fourth Circuit case, Cancun Adventure Tours, Inc. v. Underwater Designer Co., 862 F.2d 1044 (4th Cir.1988), in which the court pierced the corporate veil because the defendant company’s sole owner commingled personal and corporate assets, regularly diverted corporate assets, and used corporate funds to pay for non-corporate expenses.

See id. at 1048 . Although the court recognized that small companies often act informally, the defendant owner treated his corporate and personal affairs as though they were indistinguishable. See id. Thus, he “cannot complain when [the plaintiff], who was injured by his misrepresentations, seeks to do the same.” Id.

Although these federal cases are persuasive authority and factually similar to the instant case, our discussion, supra, demonstrates that Maryland is more restrictive than other jurisdictions in allowing a plaintiff to pierce a corporation’s veil. In Bart Arconti & Sons, supra, the two principals ³¹⁰ caused loans to be made from the corporation to themselves and subsequently reduced their indebtedness by crediting the loans against apparent unpaid salaries that were