State of Maryland Deposit Insurance Fund Corp. v. Billman

RODOWSKY, Judge. In this case of corporate fiduciary disloyalty we examine, against the background of an original record that fills a van, whether prejudice resulted from jury access to, and presumed consideration of, certain documents not in evidence. Petitioner, State of Maryland Deposit Insurance Fund Corporation (MDIF), prosecutes this action as receiver of Community Savings & Loan, Inc. (CSL), a Maryland chartered, capital stock savings and loan corporation. 1 The action seeks money damages for breaches of the duties of loyalty and care owed to CSL, one of a galaxy of corporations and limited partnerships associated with Equity Pro ⁶ grams Investment Corporation (EPIC). As this case comes to us, the roster of defendants contesting MDIF’s claims has been reduced to the respondents, Tom J. Billman (Bill-man) and Crysopt Corporation (Crysopt).

Billman was the founder of EPIC and a controlling principal in the EPIC group. Crysopt is a holding company wholly owned by Billman. MDIF obtained a judgment on a jury verdict against Billman in excess of $112 million in compensatory damages. The jury found Crysopt jointly and severally liable with Billman for approximately $94 million of that amount.

This case was tried for sixty-nine days between May 18, 1988, when the jury was sworn, and October 6, 1988, when the jury returned its verdict on the sixth day of its deliberations. On October 5, after the jury had separated for the evening, a courtroom clerk found a box containing eighty-seven unadmitted documents in the jury room. Prior to trial these documents, along with all other potential documentary evidence, had been listed as possible exhibits by one or more parties and had been prenumbered with exhibit sticker labels. The vast majority of the eighty-seven unadmitted documents had been identified at trial, but had not been formally admitted into evidence.

This was either because counsel did not formally offer an identified document or because an objection was sustained at the stage of the trial when the document was offered. Of these eighty-seven documents, twenty had been prenumbered by MDIF and sixty-seven by defendants. When the jury commenced deliberations these eighty-seven documents had been delivered into the jury room along with the 1,138 exhibits which had been admitted into evidence. The trial court denied respondents’ motions for a mistrial and received the jury’s verdict on compensatory damages.

On December 21, 1988, a United States magistrate in the District of Maryland, acting on the sworn complaint of a United States postal inspector, issued a warrant for Bill-man’s arrest on mail fraud and related charges pursuant to 18 U.S.C. §§ 1341 , 1343 (1984 & Supp.1990) and 2314 (1970 ⁷ & Supp.1990), all arising out of Billman’s activities in connection with the EPIC group. Issuance of that warrant, however, was kept secret until June 23, 1989. The Government has never been able to serve the warrant. Information obtained by the Government, including that derived from telephone wiretaps, demonstrated that Billman was no longer in the United States.

On December 1, 1989, respondents, among others, were federally indicted on the same charges. Crysopt appeared through counsel. Billman has not appeared. Shortly after return of the verdict, MDIF began efforts to collect the “judgment,” and, continuously thereafter, it has vigorously pursued that objective.

These efforts included court orders, served on Billman’s counsel, for Bill-man’s appearance on at least two separate occasions for examination in aid of execution. Billman never appeared, and the circuit court twice found respondents in contempt. Through their counsel respondents have countered MDIF’s collection efforts with motions, appeals and successful applications for stays pending appeal. Eventually, final judgment was entered in this case, and an appeal was perfected to the Court of Special Appeals.

That court reversed and remanded for a new trial. Billman v. State of Maryland Deposit Ins. Fund Corp., 80 Md.App. 333 , 563 A.2d 1110 (1989). MDIF moved that respondents’ appeals be dismissed, contending that the intermediate appellate court should not entertain a fugitive’s appeal from a civil judgment which was based upon the same course of conduct that had given rise to the criminal charges.

The Court of Special Appeals acknowledged that it had applied this “ ‘Fugitive Appeal Doctrine’ ” in some unreported decisions dismissing appeals in criminal cases, id. at 345 , 563 A.2d at 1116 , but the court declined, absent any decision from this Court, to extend the doctrine to the facts here. MDIF also argued that respondents’ appeal should be dismissed because of their repeated failure to comply with direct orders of the circuit court relating to discovery in aid of execution. Viewing the latter ⁸ contention as one addressed to its discretion, and noting the lack of personal service on Billman, the Court of Special Appeals declined to dismiss. Id. at 346 , 563 A.2d at 1117 .

Respondents raised multiple issues in the Court of Special Appeals, but that court found it necessary to address only the trial court’s denial of respondents’ motion for mistrial. The Court of Special Appeals held “that whenever materials, documents, or matters not in evidence are, nevertheless, present in the jury room and examined by the jury, prejudice to the parties is presumed. The failure of the trial judge to declare a mistrial in the instant case constitutes reversible error.” Id. at 345 , 563 A.2d at 1116 . On MDIF’s petition we issued the writ of certiorari to review the intermediate appellate court’s denial of MDIF’s motion to dismiss the appeal and the reversal of the circuit court’s denial of respondents’ motion for mistrial.

We shall state additional facts throughout this opinion to the extent necessary to explain the resolution of the issue under consideration. I Although this Court has never previously had occasion to consider the “Fugitive Appeal Doctrine,” it is widely recognized that an appellate court may dismiss the direct appeal from a criminal conviction brought on behalf of one who is a fugitive at the time of dismissal. At one time the Supreme Court of the United States removed fugitive cases from its active docket, and they remained in a procedural limbo until further order. See Eisler v. United States, 338 U.S. 189 , 69 S.Ct. 1453 , 93 L.Ed. 1897 (1949); Bonahan v. Nebraska, 125 U.S. 692 , 8 S.Ct. 1390 , 31 L.Ed. 854 (1887); Smith v. United States, 94 U.S. 97 , 24 L.Ed. 32 (1876).

Now the Court dismisses cases involving fugitive parties. See Molinaro v. New Jersey, 396 U.S. 365 , 90 S.Ct. 498 , 24 L.Ed.2d 586 (1970); Eisler v. United States, 338 U.S. 883 , 70 S.Ct. 181 , 94 L.Ed. 542 (1949) (per curiam) (memorandum decision). The Court has also sustained, against an equal ⁹ protection challenge, the dismissal, authorized by a Texas statute, of the direct criminal appeal of a prisoner who had escaped but who was reapprehended two days later. See Estelle v. Dorrough, 420 U.S. 534 , 95 S.Ct. 1173 , 43 L.Ed.2d 377 (per curiam), reh’g denied, 421 U.S. 921 , 95 S.Ct. 1589 , 43 L.Ed.2d 790 (1975). 2 There is considerable state authority supporting dismissal of a direct criminal appeal brought on behalf of a fugitive.

See Ex parte Subel, 541 So.2d 15, 16 (Ala.1989); People v. Anderson, 39 Colo.App. 497, 498 , 566 P.2d 1369, 1369 (1977); State v. Leslie, 166 Conn. 393, 394 , 349 A.2d 843, 844 (1974); Redden v. State, 418 A.2d 996, 997 (Del.1980); Jones v. State, 362 So.2d 149 , 149 (Fla.Dist.Ct.App.1978); Yates v. Brown, 235 Ga. 391, 392 , 219 S.E.2d 729, 731 (1975) (per curiam); Evolga v. State, 519 N.E.2d 532, 534 (Ind. 1988); Weser v. State, 224 Kan. 272, 273 , 579 P.2d 1214, 1215 (1978); Harris v. Commonwealth, 311 Ky. 429, 429 , 224 S.W.2d 427, 427-28 (1949); Commonwealth v. Simon, 391 Mass. 1010, 1010 , 461 N.E.2d 758, 759 (1984); Wheeler v. State, 249 So.2d 652, 652 (Miss.1971); Stradford v. State, 787 S.W.2d 832, 833 (Mo.App.1990); Arvey v. State, 94 Nev. 566, 567 , 583 P.2d 1086, 1087 (1978); State v. Rogers, 90 N.J. 187, 189 , 447 A.2d 537, 539 (1982); People v. Parmaklidis, 38 N.Y.2d 1005, 1005 , 348 N.E.2d 918, 918 , 384 N.Y.S.2d 442, 442 (1976); Prock v. State, 569 P.2d 473, 474 (Okla. Crim.App.1977); Commonwealth v. Passaro, 504 Pa. 611, 615 , 476 A.2d 346, 348 (1984); Lamb v. State, 293 S.C. 174, 175 , 359 S.E.2d 282, 283 (1987) (per curiam); Bradford v. State, 184 Tenn. 694, 699 , 202 S.W.2d 647, 649 (1947); Ex parte Reid, 581 S.W.2d 686, 689 (Tex.Crim.App.1979); Hardy v. Morris, 636 P.2d 473, 474 (Utah 1981); State v. Bono, 103 Wis.2d 654, 655 , 309 N.W.2d 400, 400 (1981). ¹⁰ There have been dismissals of direct criminal appeals by persons who had escaped, and been recaptured before final judgment was entered, and thus were in custody throughout the pendency of their appeals. See United States v. London, 723 F.2d 1538 (11th Cir.), cert. denied, 467 U.S. 1228 , 104 S.Ct. 2684 , 81 L.Ed.2d 878 (1984) (escape and recapture during trial); United States v. Holmes, 680 F.2d 1372 (11th Cir.1982) (per curiam), cert. denied, 460 U.S. 1015 , 103 S.Ct. 1259 , 75 L.Ed.2d 486 (1983) (escape and recapture after finding of guilty and before sentence). On the other hand, direct criminal appeals have been allowed where the convicted person who fled after verdict and before sentence had been a fugitive for an extended period.

See United States v. Tunnell, 650 F.2d 1124 (9th Cir.1981) (twelve years); United States v. Tapia-Lopez, 521 F.2d 582 (9th Cir.1975) (five years). With respect to appeals in civil cases there is no decision of the United States Supreme Court supporting dismissal because the party invoking the court’s jurisdiction is a fugitive. Arguably, the rationale applied by the Court would not support extension of the doctrine to civil cases. In United States v. Sharp, 470 U.S. 675 , 105 S.Ct. 1568 , 84 L.Ed.2d 605 (1984), the respondents had become fugitives after the Court had granted the Government’s petition for certiorari to review an appellate reversal of convictions of the respondents.

In rejecting a dissenting opinion’s position that the judgment under review should be vacated and the appeal dismissed, the Court distinguished the case before it from those in which “a fugitive defendant is the party seeking review[.]” Id. at 681 n. 2, 105 S.Ct. at 1573 n. 2, 84 L.Ed.2d at 612 n. 2. “In those very different cases, dismissal of the petition or appeal is based on the equitable principle that a fugitive from justice is ‘disentitled’ to call upon this Court for a review of his conviction.” Id. The disentitlement referred to traces back to Smith v. United States, 94 U.S. at 97 , where the Court said: “If we affirm the judgment, [the fugitive] is not likely to appear to submit to his sentence. If we reverse it and ¹¹ order a new trial, he will appear or not, as he may consider most for his interest. Under such circumstances, we are not inclined to hear and decide what may prove to be only a moot case.” In the civil case now before us the judgment of the Circuit Court for Montgomery County will or will not be effective based upon the merits of the appeal.

Neither its effectiveness nor its direct enforcement turns on whether or not Billman remains a fugitive. Some lower federal courts, however, have applied the doctrine to civil cases brought by fugitive plaintiffs whose guilt of some criminal offense had been determined. When plaintiffs in this class of cases fled, they were either under judgment of conviction, whether or not physically confined, or they had been found, or had pleaded, guilty. The dismissed civil cases usually, but not always, arose out of the same conduct underlying the criminal case.

See Ali v. Sims, 788 F.2d 954 (3rd Cir.1986) ( 42 U.S.C. § 1983 (1981) action challenging prison discipline); United States v. $129,-374 in U.S. Currency, 769 F.2d 583 (9th Cir.1985), cert. denied, 474 U.S. 1086 , 106 S.Ct. 863 , 88 L.Ed.2d 901 (1986); Conforte v. Commissioner of Internal Revenue, 692 F.2d 587 (9th Cir.1982), stay denied, 459 U.S. 1309 , 103 S.Ct. 663 , 74 L.Ed.2d 558 (1983) (Rehnquist, J., opinion in chambers); Arana v. United States Immigration & Naturalization Serv., 673 F.2d 75 (3rd Cir.1982) (denial of habeas corpus affirmed where applicant fled and became object of bench warrant after deportation order had been issued in administrative proceeding); Doyle v. United States Dep’t of Justice, 668 F.2d 1365 (D.C.Cir.1981), cert. denied, 455 U.S. 1002 , 102 S.Ct. 1636 , 71 L.Ed.2d 870 (1982) (affirming dismissal of action to obtain documents under Freedom of Information Act); Shaw v. Estelle, 542 F.2d 954 (5th Cir. 1976) (affirming dismissal of civil rights action regarding prison discipline); Broadway v. City of Montgomery, Alabama, 530 F.2d 657 (5th Cir.1976) (civil rights action alleging fourth amendment violation leading to subject’s arrest and conviction). ¹² A few civil cases have also been dismissed at the trial or appellate level when brought by fugitives who have been criminally charged but whose guilt has never been established in a criminal proceeding. Among these are cases involving claims to property subject to forfeiture to the sovereign because of the claimant’s alleged criminal conduct. See United States v. One Parcel of Real Estate at 7707 S. W 74th Lane, Miami, Dade County, Fla., 868 F.2d 1214 (11th Cir.1989); United States v. $45,940 in U.S. Currency, 739 F.2d 792 (2d Cir.1984); United States v. Certain Real Property Located at 760 Southwest 1st Street, Miami, Fla., 702 F.Supp. 575 (W.D.N.C.1989). Other civil cases dealing with unconvicted fugitives are not forfeiture offshoots of criminal prosecutions.

In Securities & Exch. Comm’n v. Tome, 833 F.2d 1086 , 1087 n. 1 (2d Cir.1987), cert. denied, 486 U.S. 1014 , 108 S.Ct. 1751 , 100 L.Ed.2d 213 (1988), the court dismissed Tome’s appeal from a civil judgment, based on insider trading, where Tome had fled the United States three years before he was indicted on related charges and five years before the civil judgment was entered. See also Securities & Exch. Comm’n v. Tome, 638 F.Supp. 596 , 620 n. 44 (S.D.N.Y. 1986).

And see Schuster v. United States, 765 F.2d 1047 (11th Cir.1985) (affirming dismissal of fugitive indictee’s challenge to jeopardy income tax assessment); United States v. U.S. Commanding Officer of the Office of the Provost Marshal, U.S. Army, 496 F.2d 324 (1st Cir.1974) (habeas corpus denied where applicant fled after court-martial charges brought); Dawkins v. Mitchell, 437 F.2d 646 (D.C.Cir.1970) (affirming refusal to enjoin execution of warrant under Fugitive Felon Act); Brin v. Marsh, 596 F.Supp. 1007 (D.D.C.1984) (mandamus to compel petitioner’s discharge from U.S. Army denied where petitioner fled while freedom of movement restricted during criminal investigation). We shall assume, arguendo, that a Maryland appellate court has the power to dismiss Billman’s appeal under the facts of this case. It does not follow, however, that we ¹³ are compelled to do so. Exercise of the power is discretionary.

See Clark v. Dalsheim, 663 F.Supp. 1095, 1097 (S.D. N.Y.1987); United States v. Veliotis, 586 F.Supp. 1512, 1514 (S.D.N.Y.1984); State v. Byrd, 448 N.W.2d 29, 32 (Iowa 1989). In the exercise of our discretion, we deny dismissal under the fugitive doctrine. Here the Court of Special Appeals proceeded to examine the merits of the appeal and concluded that there was error which required reversal. It is not in the interest of justice to order the appeal dismissed and the judgment of the circuit court reinstated, without any review of the merits by this Court, when a reported opinion by the Court of Special Appeals concludes that the circuit court judgment must be reversed.

Further, as we shall demonstrate in Part III, the Court of Special Appeals did not apply the proper standard in its error review. Consequently, we should address the merits under the proper standard in a certiorari review. II MDIF’s argument for dismissing the appeals based on respondents’ non-compliance with circuit court orders is unpersuasive, both legally and factually. For the argument’s foundation in Maryland law MDIF relies upon a general rule, described in Gilbert v. Arnold, 30 Md. 29, 35 (1869), as laid down by Lord Chief Baron Gilbert, which this Court last applied in unmodified form in Skirven v. Skirven, 154 Md. 267 , 140 A. 205 (1928).

Skirven dismissed the appeal by a husband from the trial court’s refusal to consider a reduction in alimony pendente lite, a refusal based on the husband’s being in contempt for failure to pay at the prescribed rate. The Court said: “[H]ere the rule is that, while one adjudged guilty of contempt may attack the finding directly, he cannot, so long as it stands unimpeached, be permitted as a matter of right to make any motion, file any petition, or assert ¹⁴ any claim for relief, in the particular suit in which the contempt has been adjudicated.” Id. at 271 , 140 A. at 207 . Skirven was distinguished in Gunter v. Gunter, 187 Md. 228 , 49 A.2d 454 (1946). An absolute divorce had converted the parties’ realty into a tenancy in common, but the trial court had dismissed a bill for partition sought by the former husband because he was in default on alimony payments.

We reversed, pointing out that in Skirven “the trial court did not undertake to finally dispose of any right, but merely required the petitioner to purge his adjudicated contempt, as a condition to granting him relief in the same proceeding.” Id. at 234, 140 A. at 457 . Skirven was argued in support of dismissing the appeal in Rethorst v. Rethorst, 214 Md. 1 , 133 A.2d 101 (1957), which had been brought by a divorced father who sought the custody of his children and who, argued his former wife, was in contempt of court. Chief Judge Bruñe, writing for the Court, noted the Gunter distinction, but went on, in reliance on decisions from other jurisdictions, to conclude that “[t]he general rule which now seems well established is that the fact that the husband is in contempt will not prevent his litigating his substantial rights in connection with which the contempt was committed.” Id. at 10, 133 A.2d at 457 . Most recently, in an interstate custody dispute we said, citing only to Rethorst , that “the fact that the mother had been adjudged in contempt [did not] bar her from taking an appeal and litigating her substantial rights in connection with which the contempt was committed.” Miller v. Miller, 247 Md. 358, 362 , 231 A.2d 27, 30 (1967).

Under these principles, we could not properly dismiss respondents' appeals. Respondents did not comply with circuit court orders to appear and be examined in aid of execution. Those orders led to contempt findings and orders that the respondents pay to MDIF specified sums of ¹⁵ money, each day, until respondents purged themselves of the contempt. But MDIF’s right to asset discovery under Maryland Rule 2-633 is dependent upon MDIF’s being a judgment creditor holding a money judgment.

The substance of respondents’ position is that the judgment should be reversed on the merits, a position with which the Court of Special Appeals agreed. Nor are the respondents in continuing contempt by the failure to pay to MDIF the daily penalties assessed by the circuit court. Enforcement of those contempt sanctions was stayed by orders of appellate courts. 3 Under these circumstances it is not appropriate to dismiss the appeals. Ill The Court of Special Appeals reversed and remanded for a new trial because the unadmitted documents were available to the jury during its deliberations.

Because the unadmitted documents formed part of the mass of materials which bore plaintiff’s or defendants’ exhibit stickers, we shall assume that the jury did not distinguish between the documents properly in evidence and those which were not formally admitted. The Court of Special Appeals’ analysis, however, was that “prejudice to the parties is presumed.” Billman, 80 Md.App. at 345 , 563 A.2d at 1116 . Thus the ¹⁶ intermediate appellate court immediately concluded that the trial court committed reversible error in denying respondents’ motion for a mistrial. To support its conclusion, the court principally relied upon two New York decisions, Public Operating Corp. v. Weingart, 257 A.D. 379 , 13 N.Y.S.2d 182 (1939) (new trial awarded where jury considered unadmitted list of replevied property bearing valuations determined in a manner contrary to court’s instructions); and Aiken v. Dunn, 1 Misc.2d 215 , 147 N.Y.S.2d 450 (St. Lawrence Co.1955) (denying new trial in personal injury case where juror brought into jury room book entitled, How to Serve on a Jury).

The approach used by the Court of Special Appeals in this case is contrary to well established Maryland law. The standard for evaluating whether a new trial should be granted under the circumstances here, where the jury deliberations included unadmitted documents, does not differ from a situation where the jury considers evidence admitted by the trial court which is later determined to have been erroneously admitted. Beahm v. Shortall, 279 Md. 321 , 368 A.2d 1005 (1977), is a case of the latter type. There Judge Orth, writing for the Court, extensively reviewed our cases. “Precise standards for the degree of prejudice required for reversal, have not been, and perhaps cannot be, established.

In Rippon v. Mercantile-Safe Dep., supra, 213 Md. [215,] 222, [ 131 A.2d 695, 698 (1956),] we noted that the complaining party made no effort to show ‘unfairness or harm.’ In Hance v. State Roads Comm., 221 Md. 164, 176 , 156 A.2d 644 [, 650] (1959) we observed: ‘Courts are reluctant to set aside verdicts for errors in the admission or exclusion of evidence unless they cause substantial injustice,’ so ‘substantial prejudice’ must be shown. In Rotwein v. Bogart, 227 Md. 434, 437 , 177 A.2d 258 [, 260] (1962) we declared that ‘this Court will not reverse for an error below unless the error “was both manifestly wrong and substantially injurious” ’, quoting 2 Poe on Pleading and Practice (Tiffany’s ed.) § 287, p. 249. In State Roads Comm. v. Kuenne, supra, 240 Md. [232,] 235, [213 ¹⁷ A.2d 567, 568,] we spoke in terms of the error having ‘a prejudicial effect on the outcome of the case.’ In I.W. Berman Prop. v. Porter Bros., 276 Md. 1, 11-12 , 344 A.2d 65 [, 72] (1975), we repeated the ‘both manifestly wrong and substantially injurious’ language of Rotwein v. Bogart, supra, and added: ‘An error which does not affect the outcome of the case is “harmless error”.’ ” 279 Md. at 331 , 368 A.2d at 1011 . Of course, “what constitutes prejudice warranting reversal in the erroneous admission ... of evidence is to be determined on the circumstances of each case.” Id. at 332 , 368 A.2d at 1012 .

In Beahm the receipt as substantive evidence of a personal injury plaintiff’s subjective symptoms, as narrated by a non-attending medical expert, “was not ‘substantially injurious’ so as to have a prejudicial effect on the outcome of the case.” Id. This was because the substance of that evidence had been admitted as part of the testimony of the plaintiff and of the attending physician. The rule is the same for erroneously admitted documents. Compare Dillon Properties, Inc. v. Minmar Builders, Inc., 257 Md. 274 , 262 A.2d 740 (1970) (hearsay in inadmissible letter found not prejudicial) with Smith v. Jones, 236 Md. 305 , 203 A.2d 865 (1964) (hearsay in inadmissible letter found prejudicial).

In determining whether improperly admitted evidence, or extraneous matter considered by a jury, prejudicially affected the outcome of a civil case, the appellate court balances “ ‘the probability of prejudice from the face of the extraneous matter in relation to the circumstances of the particular case____’” Harford Sands, Inc. v. Groft, 320 Md. 136, 138-39 , 577 A.2d 7, 8 (1990) (quoting Wernsing v. General Motors Corp., 298 Md. 406, 420 , 470 A.2d 802, 809 (1984)). It is not the possibility, but the probability, of prejudice which is the object of the appellate inquiry. Harford Sands, 320 Md. at 148 , 577 A.2d at 12-13 . Finally, “ ‘[i]t is the function of the trial judge when ruling on a ¹⁸ motion for a new trial to evaluate the degree of probable prejudice and whether it justifies a new trial.

That judgment will not be disturbed but for an abuse of discretion.’ ” Id. at 146 , 577 A.2d at 12 (quoting Wernsing, 298 Md. at 420 , 470 A.2d at 809 ). IV To evaluate whether respondents were prejudiced by the unadmitted documents in the circumstances of this case requires some general background on the nature of EPIC’s business, its relationship to CSL, the claims asserted by MDIF, and the way in which MDIF proved those claims. 4 A Billman founded EPIC in the mid-1970s. Basically its business, headquartered in Northern Virginia, was selling tax shelters in real estate. EPIC’s success depended on a continuing upward spiral of real estate values throughout the country, and particularly in Texas where EPIC invested heavily.

Since early 1982 one or more holding companies controlled by Billman (collectively, EPIC Holdings), held, directly or indirectly, all of the capital stock of CSL. EPIC Holdings was 80% owned by Billman, until February 1985, and 20% owned by a co-defendant, Clayton A. McCuistion (McCuistion). In March 1988, EPIC merged into CSL’s direct subsidiary, service company which changed its name to EPIC. Thereafter, organizationally, though not in practice, EPIC was a subsidiary of CSL.

Billman utilized the deposits in CSL for EPIC’s cash requirements. As EPIC’s business slowed in 1984 and 1985, its cash requirements became greater. In a February 1985 reorganization Billman sold his 80% interest in EPIC Holdings to McCuistion for $14 million in cash and for other considerations valued in excess of $16 million, including ¹⁹ realty on Maryland’s Eastern Shore. CSL was placed in conservatorship in early September 1985 and eventually was liquidated in receivership.

In its tax shelter business EPIC sold participations in limited partnerships of which it was the sole general partner, usually holding a 1% interest. Initially EPIC partnerships invested in model homes purchased from builders of tract housing. Later the partnerships also bought production houses and condominiums from builders. The parties, as shall we, at times have called the investments in the partnerships and the residences owned by the partnerships the “EPIC product.” EPIC partnerships financed their real estate acquisitions with mortgage loans from EPIC Mortgage, Inc. (EMI), another CSL subsidiary. 5 These residences were then rented by the partnerships to tenants.

In theory residences would be held for no more than four or possibly five years and then sold, at which time the partnerships’ creditors, including the holders of the first mortgages, would be paid, the capital contributions of the limited partners returned, and any profit distributed to EPIC and the limited partners per the partnership agreement. A unique feature of the EPIC concept was that the builder who sold a residence agreed to pay the buying EPIC partnership a rebate, called a rental deficit contribution (RDC). An RDC theoretically represented the present value of the monies required every month to meet the difference between the estimated carrying costs of the property and the total of (1) net rentals realized and (2) limited partners’ monthly capital contributions to the partnership. ²⁰ The dominant policy of the EPIC group was to avoid default by any EPIC partnership in order to maintain investor confidence. Particularly in 1984 and 1985, rents, RDCs and limited partner contributions from the various partnerships were commingled and the funds were used where most urgently needed.

Another CSL subsidiary, EPIC Residential Network, Inc. (ERNI), sought to sell, through a national network of real estate brokers, a growing inventory of non-owner occupied or vacant residences owned by matured partnerships. New EPIC partnerships (resyndications) were formed to buy from matured partnerships homes which had not been resold to independent buyers. Cash obtained from these new, limited partnerships was used for the cash requirements of matured partnerships. The ultimate source of funds was CSL.

Its deposits were advanced directly to EPIC partnerships and indirectly to them through EPIC, EMI, and ERNI in order to satisfy the cash needs of the partnerships. These loans were essentially unsecured. Where security by means of a second mortgage on a house was attempted, the second mortgages were unrecorded. By September 5, 1985, the date of the court ordered conservatorship of CSL, there were 357 outside investor, limited partnerships.

Those partnerships, EPIC, EMI, and ERNI owed CSL $82.3 million in loans and loan interest as of that date. B The theory of count I of MDIF’s complaint was that these loans violated state regulations and that the defendants violated their duty of care applicable to the circumstances. MDIF requested a verdict of $49,255,381 on count I. The jury returned a verdict against the respondents and others for $49,255,381 on count I. Those damages represent the projected net loss to CSL on the loans to EPIC entities, after credit is given to the defendants for the value of the consideration received by CSL in the sale of its assets in the receivership “workout.” ²¹ There were also three EPIC limited partnerships in which the limited partners were persons who were fiduciaries of CSL. As of August 31,1985, the advances by CSL to these insider partnerships totaled $8,364,827.

Count II of the complaint was predicated on this violation of the duty of loyalty and on Md.Code (1980,1986 Repl.Vol.), § 9-307(c) of the Financial Institutions Article (FI) which prohibits a savings and loan association from making a loan to any partnership in which an interest of 10% or more is owned by controlling persons, directors, officers or employees of the association. The jury returned a verdict against the respondents and others in the amount of $8,364,827 on count II. On February 21, 1984, CSL paid a dividend of $6,373,331 for the year 1983 to EPIC Holdings and thus, ultimately, 80% to Billman and 20% to McCuistion. On February 7, 1985, CSL again paid a dividend of $7,999,998 for the year 1984.

MDIF contended in count III of its complaint that these dividends were unlawful. Although CSL’s financial statements for those years reported a net worth which would have permitted payment of these dividends, MDIF’s position was that CSL’s assets were overstated and should have been reduced. For example, as of year end 1984, CSL reported a net worth of $26.8 million whereas MDIF contended that CSL had a negative net worth of $25.6 million. On count III MDIF sought to recover the $14,373,329 of dividends paid.

The jury returned a verdict against Billman and others on count III for $14,373,329. The defendants also required CSL and its subsidiaries, by an agreement with EPIC Holdings of March 1, 1983, to prepay their taxes to EPIC Holdings for the purported purpose of insuring that cash would be available to pay tax obligations. Count IV of MDIF’s complaint challenged this arrangement as an unsafe business practice and as a violation of the duty of loyalty. One consequence of the arrangement was that CSL could not enjoy the tax advantages of the losses being incurred by EPIC.

In the period 1983 through 1985 CSL and its subsidiaries paid to EPIC Holdings $32 million under the tax allocation agreement. ²² During that same period EPIC Holdings paid no federal taxes, paid $1 million in state taxes, and retained $31 million of the tax payments. Utilizing these funds EPIC Holdings on January 9, 1985, paid a $14 million dividend, $11.2 million to Billman and $2.8 million to McCuistion. In count IV, MDIF claimed the total of the “prepaid” taxes remitted in both years, $31,036,470. The jury returned a verdict against the respondents and others for $31,036,470 on count IV.

Count V of MDIF’s complaint involved three types of transactions which MDIF loosely classifies as unlawful fees. The principal component of the claim, $4,754,023, consists of management fees paid by CSL and three of its subsidiaries to EPIC Holdings for the three years ending December 31, 1985. MDIF proved that no meaningful services were rendered by EPIC Holdings and that the management, accounting and legal services performed for CSL and its subsidiaries were rendered by their own employees or by independent contractors. A second component of count V involved two other subsidiaries of EPIC Holdings from which CSL and its subsidiaries were required to lease furniture and equipment.

CSL was also required to pay the tax liabilities of those leasing companies. They were ultimately sold to CSL. MDIF’s claim of $812,394 represents the profit made by EPIC Holdings through those two leasing corporations. 6 The third component of the claim is $200,000 paid to EPIC Holdings by CSL on a transaction known as Plaza East. The ostensible reason for that payment has never been determined.

MDIF sought $5,766,417 on these three components of count V. The jury returned a verdict of $5,766,417 against respondents and others on count V. ²³ Count VI of the complaint alleged breaches of duty on the part of certain non-corporate defendants in the payment of excessive salaries, bonuses, and perquisites during the three years ending December 31, 1985. Eliminating duplication with the other counts, MDIF sought from Billman and certain other defendants, $3,401,400 on count VI. The jury returned a verdict against Billman and others for $3,401,400 on count VI. C A central theme of MDIF’s presentation of its case was that Billman used CSL to “feed the EPIC machine.” The quoted language is set forth verbatim in the minutes of a special meeting of the CSL Operations Committee of April 15, 1985.

Those minutes refer to an October 1984 meeting of the presidents of seven EPIC group companies and of CSL at which goals were set for all. Those minutes state that “[CSL’s] # 1 goal as the deposit center is to attract deposits to feed the EPIC machine____” Collectability of the $82.3 million in advances by CSL to or for the benefit of the EPIC partnerships depended almost entirely on appreciation of the homes owned by the partnerships. These advances by CSL were junior to the first liens of the purchase money mortgages which had been sold to entities outside the EPIC group. In the matured partnerships the RDCs were exhausted and the limited partners had no further obligation to contribute capital.

CSL theoretically had recourse against the unlimited liability of the general partner, but the general partner, EPIC, directly owed to CSL $14.7 million of the $82.3 million in advances involved in count I. Income of the matured partnerships was limited to whatever net rent the properties could produce. The structure of the transactions, however, had never anticipated that the net rents would carry the property, as evidenced by the need for RDCs. ²⁴ Against this background, a major portion of MDIF’s case was devoted to establishing that the CSL fiduciaries could not reasonably have expected to recover from equity in the partnerships’ realty the advances which CSL continued to make. Insufficient equity in the EPIC product was relevant to count I where MDIF sought CSL’s net loss on the loans to EPIC partnerships and entities. Insufficient equity in the EPIC product was also relevant to count III where the issue was basically whether the need for reasonable reserves for bad debts under the circumstances of this case made it unlawful to take dividends out of CSL.

The witness whom MDIF used to present its case as a cohesive whole was David A. Carpenter (Carpenter), the national director of litigation services for Coopers & Lybrand, an international accounting and consulting firm. Carpenter’s firm was engaged by MDIF to assist in day-to-day operations of the conservatorship and receivership and also to do a comprehensive analysis of the EPIC group transactions. That study involved approximately seventy EPIC related entities as well as approximately 360 EPIC partnerships. The study required examining documents which filled 2,000 transfiles.

Over 100 different people expended over 20,000 hours of effort in the study. In Carpenter’s opinion the CSL loans to EPIC entities ' were “grossly imprudent,” for many reasons. They were used to fund negative cash flows, i.e., “real money [with] [n]o depreciation included____” The EPIC partnerships’ negative cash flow for 1982 was $25 million. In a February 21, 1983, memorandum to Billman from a co-defendant, the combined cash flow deficit for that year was predicted to be $38.3 million.

In fact it was $38.6 million, cumulatively, at the end of that year. By the end of 1984 the cash flow deficit was $51 million. When the conservator took possession in 1985 the cumulative, negative cash flow of the partnerships was $113 million. CSL had no lien on its only source of repayment, the EPIC product.

CSL was a general, unsecured creditor, junior to the holders of the first liens. Carpenter testified ²⁵ that the partnerships were highly leveraged. EMI purportedly made the first mortgage loans at 95% of value. Moreover, payment by the seller to EPIC of the RDCs meant that the partnerships were borrowing over 100%, and up to 120%, of value.

Thus there was no equity from which CSL could be repaid. From an income standpoint the vacancy rate for EPIC product in January 1984 was 19.4%. The fact that the ultimate repayment depended on rental housing as opposed to owner occupied dwellings increased the risk. To limit that risk a Maryland Department of Savings and Loan (DSL) regulation required associations to maintain a minimum of 50% of total assets invested in owner occupied dwellings.

CSL’s percentage was below 10% in 1983 and 1984 and below 20% in 1985. Indeed, a February 27, 1984, memorandum from CSL’s president to Billman advised that CSL was $120 million short of the 50% minimum. In Carpenter’s opinion risk was also increased by the geographical distance between CSL and the EPIC product. Of 18,084 houses owned by the partnerships as of January 1985, 58.19% were in Texas, 8.38% in California, 6.37% in Florida, and 5.28% in Arizona.

This geographical concentration, particularly in Texas where real estate values were declining, also increased the risk. Carpenter emphasized the poor resale record of EPIC product. EPIC internally projected sales of 693 homes in 1983, but 174 were sold. Of these, 161 were sold to resyndicated EPIC partnerships and only thirteen to independent third parties.

For 1984 sales of 1,316 houses were projected, but 324 were actually sold. Of these, 301 were sold to resyndicated partnerships and only twenty-three to independent third parties. Eleven of those twenty-three sales included either ERNI’s guarantee that a specified amount of rent would be paid by the tenant or ERNI’s payment of a rental subsidy. For 1985 EPIC projected sales of over 10,000 homes.

One hundred twenty-five were sold. One hundred seventeen of these sales included a rental guarantee or subsidy, six included no guarantee or subsidy, and two were sold to resyndicated partnerships. ²⁶ In May 1984 a financial services corporation, Private Ledger, rendered a due diligence report on one of the partnerships, EPIC Associates 84 VI. The defendants came into possession of a copy of the report and responded to it. EPIC’s offering, the report said, “is identical to buying a single house that is substantially (59%) over priced and rents for half of what it costs to carry.” The report pointed out that EPIC’s fees were “VERY HIGH ... at least ... [50%] of the capital raised.” It warned that the offering would probably be judged a “ ‘Tax Abuse’ ” because the venture lacked economic viability.

It said “[tjhere is no equity, to provide investors with an incentive to pay nonrecourse debt[.J” Private Ledger thought that “[t]he properties are so over financed and under rented that no amount of inflation can bail out the program.” With respect to EPIC’s projections the financial service said: “The sponsor’s sales projections are erroneously based on appreciation from a false basis of value. Appreciation must be calculated from the properties’ value which is the amount the seller netted from the sale ($3,003,000). The arbitrarily construed ‘cost’ ($3,701,875) is