Shapiro v. Greenfield

KENNEY, Judge. This appeal arises out of a derivative suit brought by minority shareholders, Marvin and Betty Greenfield (appellees), against, among others, College Park Woods, Inc. (“College Park”) and its officers and directors (appellants), alleging usurpation of a corporate opportunity of College Park and seeking an accounting and dissolution of the corporation. By order dated February 23, 1998, the trial court found that the disputed transaction constituted usurpation of corporate opportunity, that there were no disinterested directors, and that the transaction was not fair and reasonable to the corporation. The trial court appointed a single receiver for College Park.

Appellants filed a timely notice of appeal and present three issues, which we have re-numbered as follows: I. Whether the trial court’s ruling that the Clinton Crossings Shopping Center was a corporate opportunity of College Park was clearly erroneous? ⁵ II. Whether the trial court erred in appointing a receiver to assume control of a corporation when the trial court did not make the statutorily required findings of illegal, oppressive, or fraudulent conduct by the corporation’s directors?

III

Whether the trial court erred in not finding that shareholder plaintiffs estopped from challenging a corporate act where shareholder plaintiffs, after being duly notified, elected not to attend the shareholders’ meeting where the corporate act was voted upon? FACTUAL BACKGROUND Charles Shapiro was the operating officer for College Park during the relevant time period. Other officers and directors included Joan Smith, Charles’ sister, and Michael Shapiro, Charles’ son. 1 Appellee Marvin Greenfield is Charles Shapiro’s cousin. In 1961, College Park acquired approximately 68 acres of land in Prince George’s County, on which it constructed the 72,000 square foot Clinton Plaza shopping center.

By 1991, Clinton Plaza was only 50% leased and generating insufficient cash flow. It was decided that the best use of the land was not the continuation of Clinton Plaza, but redevelopment of the property into a substantially larger shopping center. Having determined that College Park was not capable of redeveloping Clinton Plaza on its own, the directors explored suitable partnerships or joint ventures, but for some time did not find any. Charles Shapiro, the operating officer of College Park, subsequently developed a joint venture with S. Bruce Jaffe, an occasional business partner of his with experience developing retail space.

The joint venture required the creation of three entities: 1) Clinton Crossings Limited Partnership (“Clinton Crossings Partnership”), which was to own the redeveloped Clinton Plaza shopping center; 2) Clinton Crossings, Inc., which was to be a one percent owner and the general partner ⁶ of Clinton Crossings Partnership; 2 and 3) TSC/Clinton Associates Limited Partnership (“Clinton Associates”), which was to own forty-nine percent of Clinton Crossings Partnership. 3 College Park was to transfer its fee simple interest in Clinton Plaza to Clinton Crossings Partnership in exchange for a fifty percent limited partnership interest in Clinton Crossings Partnership, the owner of the redeveloped center. Clinton Associates was to contribute everything necessary for the shopping center’s redevelopment with the exception of the land. As a limited partner, College Park would have no rights to manage, direct or control the affairs of Clinton Crossings Partnership. Clinton Crossings Partnership and Clinton Associates, on the other hand, would assume the risk associated with the redevelopment, while College Park would assume none.

Moreover, College Park would not be obligated to transfer its interest in Clinton Plaza until Clinton Associates had obtained a construction loan, pre-leased at least eighty percent of Phase I space, and obtained a debt coverage ratio of 1 to 1. The agreement further provided that, if Phase II of the development was not completed within five years, any unused portion of the land would revert to College Park. A capital account in Clinton Crossings Partnership was to be established for College Park, in the amount of $4.00 per square foot for land used in the redevelopment. With Phase I expected to utilize 36 acres, College Park’s capital account was funded at $6,272,640.

On October 26, 1991, a special meeting of College Park’s shareholders was called for the purpose of “considering and approving a resolution authorizing the corporation to enter into a limited partnership agreement with Clinton Crossings, Inc., ... and TSC/Clinton Associates Limited Partnership ...” Advance notice of the meeting included documents that ⁷ described the joint venture in detail. The notice also provided: The transaction to be considered at the Special Meeting is an interested director transaction within the meaning of Section 2-419 of the Corporations and Associations Article of the Code of Maryland because (i) Charles S. Shapiro and Michael Shapiro are each directors of the Corporation, (ii) Charles S. Shapiro is the sole shareholder of Clinton Crossings, Inc., and (iii) it is expected that Charles S. Shapiro and Michael Shapiro will each have an interest, directly or indirectly, as a limited partner in TSC/Clinton Associates Limited Partnership. Appellees, Marvin and Betty Greenfield did not attend this special meeting. 4 At the meeting, the shareholders present unanimously voted for the proposal. Appellees contend that following the October 26, 1991 meeting, they protested that the votes taken at the meeting were not valid as none of the directors could be considered disinterested directors and thus their votes as shareholders could not be counted.

Appellees also asserted their right to inspect the corporation’s books and records. 5 On April 2, 1992, College Park directors met to ratify actions taken by the corporation at the special meeting and other occasions. On April 3, 1993, the appellees visited the College Park offices and sought inspection of the corporate books and records. They viewed the corporation’s minute book and stock ledger, in addition to a series of promissory notes executed by College Park, Charles Shapiro, and other entities which Charles Shapiro owns or controls. When they ⁸ requested other documents relating to the transactions described in the April 2, 1992 minutes, they were refused.

Appellees filed this suit on July 15, 1992, against College Park and its directors, Charles S. Shapiro, Miehael Shapiro, and Joan Smith, requesting “damages, an accounting, the appointment of a receiver, the imposition of a constructive trust, the dissolution of the corporation, attorneys’ fees, costs and other legal and equitable relief.” Between 1991 and 1994, Shapiro and Jaffe guaranteed over $2 million in bonds and expended over $1 million for marketing, advertising, and other pre-construction activities. Clinton Associates also expended over $1 million in risk capital, hiring architects, and engineers. By 1994, Jaffe had secured leases with Safeway, Caldor, Fashion Bug, Baskin Robbins, and others, had fulfilled all conditions for the construction loan commitment, and had satisfied the debt ratio and pre-leasing requirements. Without further shareholder action, on April 20, 1994, College Park conveyed the land to Clinton Crossings Limited Partnership in exchange for a fifty percent interest in Clinton Crossings Partnership and the establishment of a capital account in the amount of $6,272,640.

Charles Shapiro and Jaffe both personally guaranteed Clinton Crossings Partnership’s $21.5 million construction loan with NationsBank. 6 It was projected that, upon completion of Phase I of the redevelopment, the project would have a value of $36.5 million and immediately realize an annual positive cash flow of approximately $1 million. As a result, College Park’s cash flow was expected to go from negative to approximately $500,000 annually. On October 4, 1994, appellees amended their complaint adding CCI, Clinton Crossings Partnership, and Clinton Associates as defendants, and alleged that the Clinton Crossings ⁹ redevelopment was a corporate opportunity that belonged to College Park and was usurped by the appellants. The matter was tried before the Circuit Court for Montgomery County from May 1 to May 4, 1995.

On June 29, 1995, the trial court entered an interlocutory order granting appellees’ request for an accounting, and appointed a special master to determine specific factual issues. The special master filed his Report of Factual Findings, Conclusions, and Recommendations (“Report”) on October 17, 1997. In the Report, the master concluded: These determinations will have significant impact on the relative financial positions of the parties. I have made these recommendations for legal decisions to the Court, since I am not a lawyer and do not believe I possess the appropriate expertise to make ultimate legal findings on these two issues.

However, I did perform fact finding and analysis on these two issues to aid the Court in its decision. These specific issues I recommend for legal decisions are: (1) The legality and appropriateness of the [College Park] board approval of the numerous related party loans made from CPWI to Mr. Shapiro and other Shapiro owned companies (the so called Interested Director issue). (2) The legality of [College Park’s] retroactive imposition of the fees inherent in the June 1982 Management Agreement between [College Park] and CSS Management. No exceptions were taken to the Report.

On December 2, 1997, appellees filed a motion to appoint a receiver for College Park. Hearings on the motion were held on December 18, 1997, January 8, 1998, and February 9, 1998. A suggestion of bankruptcy for Charles Shapiro, president of College Park, was filed on February 6,1998. On February 28, 1998, the trial court granted appellees’ motion, appointing a single receiver for College Park, and a separate single receiver for other related Shapiro corporations, 7 stating that “the ¹⁰ appointment of specific receivers and the duties and powers of the receivers shall be the subject of a further order by the Court.” Appellants filed a notice of appeal.

On March 27, 1998, the trial court appointed Neil H. Demchick as the receiver for College Park, specifying his powers and duties. MOTION TO DISMISS Prior to filing briefs in this appeal, appellees filed a motion to dismiss, arguing that appellants “appealed the wrong order.” They asserted that the February 23, 1998 order did not “appoint any receivers, and most importantly, it did not set forth the powers of any such receivers or terms upon which their appointment was conditioned.” They contend that the February order was an “interlocutory order apprising the parties of the court’s intent to enter a subsequent final order on the issue” and thus, unappealable. This Court denied appellees’ motion to dismiss “without prejudice to appellees’ right to move for dismissal in their brief.” Appellees renewed their motion in their brief. Maryland Code (1974, 1998 Repl.Vol.), § 12-303 of the Courts and Judicial Proceedings Article (“CJ”) provides that appeals may be taken from certain interlocutory orders, including the appointment of a receiver. 8 The parties dispute whether the February 23, 1998 order was, in fact, the order “appointing a receiver” in this case.

The February 23,1998 order provided: WHEREAS, this Court previously having ruled, with respect to the transactions described in the Amended Complaint and the Special Master’s Report, including the transfer of the Clinton Crossings Shopping Center from [College ¹¹ Park] to [Clinton Crossing Partnership] done in April, 1994, that Charles Shapiro’s son, Michael Shapiro, and his sister, Joan Smith, are and were not disinterested directors, that the transactions were not fair and reasonable to [College Park] and that the transactions constituted improper interested director transactions and usurpations of corporate opportunities. Upon consideration of the pleadings, papers and evidence in this matter, the Report of the Special Master, the arguments of counsel and the Court’s findings of fact and conclusions of law, it is this 23rd day of February, 1998, hereby ORDERED: 1. A single receiver is appointed for [College Park]. 2. A separate single receiver is appointed for [Clinton Crossings Inc.], [Clinton Crossings Partnership], and [Clinton Associates]. 3.

The parties shall consult with each other with a view toward agreement on the designation of (a) a receiver for [College Park] and (b) a receiver for [Clinton Crossings, Inc.], [Clinton Crossings Partnership], and [Clinton Associates], Within seven days from the date of this Order, the parties shall provide the Court with the name or names of any agreed upon receiver or receivers and or in the absence of complete agreement, the name or names of any proposed receiver or receivers. The permission of a proposed receiver must be obtained before that person’s name is given to the Court. The parties shall include a resume for each proposed receiver and an affidavit, in conformity with Md. Rule 13-302, executed by each proposed receiver. 4. The appointment of the specific receivers and the duties and the powers of the receivers shall be the subject of a further order by this Court.

Appellants noted their appeal of this order on March 25, 1998. A hearing was held on March 27, 1998, in which the parties disputed the powers and duties of the receivers, their compensation, particularities of language to be employed in the order, and the source of funds to be used by the receiver. ¹² On that day, the trial court entered the order naming the receiver and specifying the receiver duties. Appellees contend that appellants improperly appealed the February 23, 1998 order, rather than the March 25, 1998 order that specifically named the receiver. We disagree. “The right of appeal is given to test the validity of the order taking custody of the property by a receiver, not the propriety of the particular selection of the receiver so appointed.” Benningfield v. Benningfield, 155 S.W.2d 827 , (Tex.Civ.App.1941); See also Buck v. Johnson, 495 S.W.2d 291 (Tex.Civ.App.1973).

In Benningfield , a receiver was appointed on May 9, 1940. That receiver, however, failed to qualify, and on May 15,1940, a second receiver was appointed. Appellant appealed the second order. The court found that appeal of the second order was untimely, and the case was dismissed for want of jurisdiction.

In Buck , a receiver was appointed by the court in a real estate development suit in August 24, 1972, and no appeal was taken. The appellant later sought to terminate the receivership, which motion was denied. On appeal, appellant asserted fundamental errors concerning the appointment and continuation of a receiver. The court held that the appeal of the receiver’s appointment was improper, reasoning that “When a trial court decides to appoint a receiver in a given case, the question to be decided from which the complaining party is allowed to appeal is whether the property in litigation should be taken into the custody of the court and administered by a receiver.

In other words, the question is as to the propriety of having a receivership.” Buck, 495 S.W.2d at 296 . While we recognize the factual difference between the cases cited and the one at bar, we find the reasoning insightful. The thrust of appellants’ argument on appeal is that the trial court did not make proper findings to support the appointment of a receiver. Specifically, they argue that there was insufficient evidence to support the trial court’s findings that the transaction was not fair and reasonable to the corporation and that appellants usurped a corporate opportunity.

All of ¹³ these issues were generated by the trial court’s order of February 23, 1998, wherein the trial court ordered the appointment of a receiver for College Park. To be sure, the trial court offered the parties the opportunity to agree on the individual to be selected, but it was the appointment of any receiver, not the appointment of a particular receiver, to which appellants objected. We find that this order was properly and timely appealed by the appellants, pursuant to CJ § 12-303(3)(iv). I. Corporate Opportunity Appellants argue that the trial court erred in finding that the redevelopment plan for Clinton Crossings was a corporate opportunity that was usurped by appellants.

Both parties rely on the case of Independent Distributors, Inc. v. Katz, 99 Md.App. 441 , 637 A.2d 886 , cert. denied, 335 Md. 697 , 646 A.2d 363 (1994), for the proposition that officers or directors will not be held liable for usurpation of corporate opportunity if the transaction was fair and reasonable to the corporation. Several commentators, however, have criticized this Court’s opinion in Katz , asserting that we “confus[ed] an interested director transaction with a corporate opportunity.” Eric G. Orlinsky, Corporate Opportunity Doctrine and Interested Director Transactions: A Framework for Analysis in an Attempt to Restore Predictability, 24 Del.J.Corp.L. 451 (1999); See also James J. Hanks, Jr., Maryland Corporation Law § 6.23 (1995, 1999 Supp.) (“Hanks”). Therefore, we will begin our discussion with an analysis of interested director transactions and the doctrine of usurpation of corporate opportunity. Concepts related to corporate opportunities and interested director transactions find their genesis in a director’s duty of loyalty to the corporation.

The longstanding common law rule in Maryland was “that any contract between a corporation and one of its officers or directors as to a matter in which the officer or director had a substantial personal interest was void or voidable.” Sullivan v. Easco Corp., 656 F.Supp. 531, 533 (D.Md.1987)(quoting Chesapeake Const. Corp. v. Rodman, 256 Md. 531, 536 , 261 A.2d 156 (1970)). In 1976, Maryland ¹⁴ adopted Md.Code (1975, 1999 Repl.Vol.), § 2-419 of the Corporations and Associations Article (“CA”) and rejected the common law rule. 9 Such action recognized that “an interest conflict is not in itself a crime or a tort or necessarily injurious to others” and “in many situations, the corporation and the shareholders may secure major benefits from a transaction despite the presence of a director’s conflicting interest.” Dennis Block, Nancy Barton, and Stephen Radin, 1 The Business Judgment Rule: Fiduciary Dutiies of Corporate Directors, 266 (5th ed.1998)(citing 2 Model Bus.Corp.Act Ann. §§ 8.60 to .63 Introductory Comment at 8-397(3d ed.1996)). Corporations and Associations § 2-419 provides that an interested director transaction is not void or voidable solely because of the conflict of interest and creates a “safe harbor” for certain transactions which satisfy the statute.

Under the ¹⁵ statute, an interested director could inform the shareholders or directors of his conflicting interests and give the board of directors or shareholders an opportunity to approve or ratify the transaction. Moreover, a nondisclosed interested director transaction may be valid, if it is found to be fair and reasonable to the corporation. CA § 2-419(b)(2). By contrast, “[m]ost corporate opportunities do not involve transactions with the corporation; rather, they involve transactions that are taken from the corporation.” Hanks, at 220.10.

The principles used to determine whether a director is interested or disinterested “turn upon the involvement of the director in the contract or transaction to which the corporation is a party. A corporate opportunity typically presents the reverse factual situation: the non-involvement of the corporation in a contract or transaction in which it may have an interest.” Hanks, § 6.23, at 220.8, n. 328. “Simply stated, an interested director transaction statute applies where a director seeks to transact business with the corporation. Conversely, a transaction should be analyzed under the corporate opportunity doctrine where a director seeks to take an opportunity from the corporation.” 24 Del.J.Corp.L. at 457. The doctrine of usurpation of corporate opportunity attempts to “precludef ] a director or officer from appropriating for himself a business opportunity that ‘belongs’ to the corporation.” Law of Corporate Officers and Directors p. 1 ch. 4.

The Court of Appeals describes the prohibition on usurpation of corporate opportunities by stating that corporate personnel are “precluded from diverting unto themselves opportunities which in fairness ought to belong to the corporation.” Maryland Metals, Inc. v. Metzner, 282 Md. 31, 49 , 382 A.2d 564 (1978). We have said that “[t]his rule, known as the corporate opportunity doctrine, prohibits a fiduciary from usurping, for his personal benefit, a business opportunity rightfully belonging to the corporation.” Lyon v. Campbell, 120 Md.App. 412, 440 , 707 A.2d 850 , cert. denied, 350 Md. 487 , 713 A.2d 980 (1998). “Under Maryland law, one who stands in a fiduciary relationship to a corporation must not acquire or ¹⁶ interfere with property in which the corporation has an interest or a reasonable expectancy in detriment to the corporation.” Lyon, 120 Md.App. at 440 , 707 A.2d 850 . In determining whether an opportunity is a corporate opportunity, Maryland follows the “interest or reasonable expectancy” test. Katz, 99 Md.App. at 458 , 637 A.2d 886 .

This test “focuses on whether the corporation could realistically expect to seize and develop the opportunity. If so, the director or officer may not appropriate it and thereby frustrate the corporate purpose.” Katz, 99 Md.App. at 458 , 637 A.2d 886 (quoting Hanks, § 6.23 at 219). “If the opportunity is a corporate one, then the director or officer to whom it is presented or who becomes aware of it must first present it to the corporation, before pursuing it himself.... Only if the corporation rejects the opportunity may a director or officer exploit it for his own benefit.” Hanks, § 6.23 at 220.7 to 220.8. “When an officer or director breaches his duty of loyalty to the corporation by usurping a corporate opportunity for his personal benefit, the corporation may claim all of the benefits of the transaction for itself.” Pitman v. Aran, 935 F.Supp. 637, 645-46 (D.Md.1996). This Court discussed in Katz both interested director transactions and the usurpation of corporate opportunity.

In Katz , minority shareholders brought suit against the corporation and its directors and shareholders, alleging that the director shareholders had usurped a corporate opportunity when they declined to purchase property on behalf of the corporation, formed a separate partnership to purchase the property, and subsequently leased the property to the corporation. We determined that the transaction should be subject to the corporate opportunity analysis. We then concluded that the transaction, as it was not fair and reasonable to the corporation, constituted a usurpation of corporate opportunity, reasoning that “the linchpin of the [corporate opportunity] rule and the exceptions is fairness and reasonableness to the corporation.” Katz, 99 Md.App. at 459 , 637 A.2d 886 . ¹⁷ Criticisms of Katz stem from the application of the “fair and reasonable” standard of interested director transactions to the usurpations of corporate opportunity analysis. The critics argue that “there is no fairness/reasonableness exception to the requirements of the corporate opportunity doctrine.” Hanks, § 6.23 at 220.10.

Taking a profitable opportunity from the corporation is inherently unfair. Therefore, fairness is not a part of the corporate opportunity analysis in the same sense that it is in an interested director transaction in determining whether the transaction is fair. Rather, fairness only plays a small role in determining whether a corporate opportunity exists in the first place. 24 Del.J.Corp.L. at 463. Because we find that appellants’ involvement in the redevelopment transaction was not a usurpation of corporate opportunity, we are not required, in this case, to reconsider Katz .

Essentially, appellees complain about the propriety of the transaction, with emphasis on College Park’s relinquishment of College Park’s fee simple interest in its property, College Park’s reduced management role in the redevelopment project, and appellants’ personal use of corporate assets. Although Charles Shapiro’s involvement in the redevelopment project clearly demonstrates a conflict of interest, this is not a situation where appellants capitalized on an opportunity that should have been presented to the corporation, but was not. Rather, the corporation entered into a business arrangement with other entities in which certain directors had, or potentially had, a direct financial interest. Therefore, we hold that the transaction did not constitute a usurpation of corporate opportunity.

We turn now to the issue of whether the trial court properly conducted the analysis required under CA § 2-419 for interested director transactions. In reviewing the Order of February 23,1998, we note that the order