Yost v. Early

BISHOP, Judge. Thomas O. Early (Early), appellee and cross-appellant, filed a seven count Amended Complaint which named the Saturn Corporation (Saturn) and Fielding Yost (Yost), appellants and cross-appellees, and Martha Ballenger (Ballenger) as defendants. The counts of the Amended Complaint made the following allegations: ³⁷⁰ Count 1 sought damages against Saturn for the breach of an implied lifetime employment contract with Early; Count 2 sought damages against Saturn for the wrongful discharge of Early; Count 3 was a shareholder derivative action which sought damages on behalf of Saturn against Yost and Ballenger for the mismanagement of Saturn and the misappropriation and waste of corporate funds and assets for their personal use with respect to three types of transactions known as (1) Rosepoint, (2) Gator Lube and (3) travel and entertainment; Count 4 sought damages against Yost and Ballenger for breaches of their fiduciary duties as officers and directors of Saturn; Count 5 sought damages against Saturn, Yost and Ballenger for the conversion of certain computer programs created by Early and used by Saturn; Count 6 sought damages against Saturn, Yost and Ballenger under the theory of unjust enrichment based on Saturn’s use of the computer programs mentioned in Count 5; and Count 7 sought damages against Yost and Ballenger for misrepresenting to Early that no one person would own a controlling interest in Saturn. Saturn, Yost and Ballenger filed motions for summary judgment which the court granted as to Counts 1 and 2.

Subsequently, Ballenger was dismissed as a defendant on all Counts. A jury trial was held on the remaining counts. At the close of Early’s case, Saturn and Yost moved for judgment on all counts which the court granted as to Counts 4, 5 and 6. As a result, Saturn was dismissed from the case.

Yost rested without calling any witnesses and renewed his motion for judgment on Counts 3 and 7. The court reserved its ruling and Counts 3 and 7 went to the jury. The jury returned a verdict in favor of Yost on Count 7. The jury also returned a verdict in favor of Early on Count 3 and ³⁷¹ awarded damages in the amount of $200,000.00 for the Rosepoint transactions.

No damages were awarded for the Gator Lube and travel and entertainment transactions. The court then entered its denial of Yost’s motion for summary judgment on Count 3. Yost and Early appealed. Issues Presented Appellant Yost presents the following issues on appeal: I. Whether the court erred when it accepted Michael Olwell as an expert in “computer leasing,” allowed Mr. Olwell to state his opinions on “computer leasing,” admitted Exhibit No. 91, which contained Mr. Olwell’s opinions, and refused to permit appellant to cross-examine Mr. Olwell’s qualifications prior to admission of Exhibit No. 91; and II.

Whether the court erred when it denied appellant’s motion for judgment on Count 3 (shareholder derivative action). Cross-appellant Early presents the following issues on cross-appeal: III. Whether the court erred when it granted summary judgment for Yost and Saturn on Count 1 (breach of employment contract) and 2 (wrongful discharge); and IV. Whether the court erred when it granted judgment for Yost and Saturn on Counts 5 (conversion) and 6 (unjust enrichment).

Statement of Facts The following facts are undisputed. In late 1980, Early met with Yost, Ballenger, Ken Gorsett and Hank Quattro, who were interested in forming a corporation to provide data processing to organizations for use in direct mailings. Early, who was the only computer programmer in the group, knew that the corporation would require computer programs to edit, update and manage data. Since January 1980, Early had been working on programs to perform these tasks. ³⁷² On May 14, 1981, Saturn was incorporated, and it opened for business on July 1, 1981.

Early, who had continued to work on his programs, completed them by July 1981. He referred to them as the EA System. The programs were coded on COBOL coding sheets and yellow sheets of paper. Ballenger, one of Saturn’s officers, directors and stockholders, and her staff transferred the code onto magnetic tape.

Saturn then returned the coding sheets to Early or discarded them with his consent. In either event, they no longer exist. A copy of the magnetic tape was kept at Saturn. From the magnetic tape, the programs were loaded and stored on a magnetic disc at Papas Computer Services, a business that sold computer use and time.

The magnetic disc resided at Papas Computer Services until it was copied onto a magnetic disc and loaded into Saturn’s own computer, which Saturn obtained in the Spring of 1982. In 1985, Saturn decided to upgrade its computer system, but it did not have the resources to purchase the equipment directly and maintain its line of credit at the level needed to finance its operation and growth. Saturn decided to lease the new equipment and it had the option of either a capital lease or an operating lease. 1 If Saturn leased the equipment through a capital lease, it would have to record the lease as a debt which would eliminate its line of credit. Saturn, therefore, leased the new equipment through an operating lease which is not required by generally accepted accounting principles to be recorded as a debt.

This way, Saturn was able to maintain the necessary line of credit. To implement the required leasing arrangement, Yost and his wife, Carolyn, formed a partnership known as Rosepoint Associates (Rosepoint). Rosepoint leased equipment for a three to five year period and then subleased the same equipment to Saturn, through an operating lease, with an ³⁷³ added fee of twenty percent. The fee charged by Rosepoint was assessed in order to compensate the Yosts for assuming personal liability for the equipment; however, Saturn also guaranteed Rosepoint’s lease payments.

Saturn was Rosepoint’s only customer. The lease agreements between Saturn and Rosepoint were entered into on an annual basis. The first lease agreement was executed on December 31, 1985, by Yost as president and Early as secretary. A second lease agreement was executed in December 1986, but it was not executed by Early.

In January 1987, Early was removed as an officer and director of Saturn and his employment was terminated. Additional lease agreements were executed for the years 1988, 1989 and 1990. Early never sold his stock and continues to own twenty-two percent of Saturn. Additional facts will be included in our discussion of each issue.

Discussion I. Appellant Yost contends that the court erred when it accepted Michael Olwell as an expert in “computer leasing” and admitted his opinions into evidence. We disagree. Whether a witness is qualified to be an expert witness is a determination within the discretion of the trial court, and it will not be reversed on appeal unless the trial court abused its discretion. Beahm v. Shortall, 279 Md. 321, 338-39 , 368 A.2d 1005 (1977) (citing I.W. Berman Prop. v. Porter Bros., 276 Md. 1, 12-15 , 344 A.2d 65 (1975)).

The standard against which the trial court exercises its discretion is that “a witness may be competent to express an expert opinion if he is reasonably familiar with the subject under investigation, regardless of whether this knowledge is based upon professional training, observation, actual experience, or any combination of these factors.” Radman v. Harold, 279 Md. 167, 169 , 367 A.2d 472 (1977). In other words, “[a] witness is qualified to testify as an expert when he exhibits such a degree of knowledge as to ³⁷⁴ make it appear that his opinion is of some value” regardless of where the knowledge was gained. Id. at 170 , 367 A.2d 472 (quoting, Casualty Ins. Co. v. Messenger, 181 Md. 295, 298-99 , 29 A.2d 653 (1943)).

See also, e.g., Serdenes v. Aetna Life Ins. Co., 21 Md.App. 453, 462-64 , 319 A.2d 858 cert. denied, 272 Md. 748 (1974). Olwell testified that he had structured approximately 250 computer leases a year for the previous eleven years. Included in the structuring of these leases was his determination of whether the lease should be an operating or capital lease.

Olwell was also familiar with the accepted accounting procedures necessary to determine whether a lease is structured as operating or capital. Based on this testimony, the court did not abuse its discretion when it qualified Olwell as an expert in “computer leasing.” Appellant Yost contends that the court erred when it admitted Olwell’s opinions because they confused the jury. Again, we disagree. Early alleged in Count 3 of his complaint that Yost mismanaged Saturn and misappropriated Saturn’s funds for his personal use in violation of Md.Corps. & Assoc.Code Ann. § 2-405.1 (1990).

Subsection (a)(3) provides that “[a] director shall perform his duties as a director ... [w]ith the care that an ordinarily prudent person in a like position would use under similar circumstances.” In this appeal, these allegations center around the lease agreements between Rosepoint and Saturn. Appellants contend that Saturn entered into these lease agreements because Yost was advised by “his accountants” that these were Saturn’s only options. Olwell testified that the equipment could have been leased directly as an operating lease by Saturn at a substantial savings. The admissibility of expert testimony is a matter of discretion for the trial court, and the court’s determination will only be reversed if the court has abused its discretion.

Radman, 279 Md. at 173 , 367 A.2d 472 . In exercising its discretion, the trial court determines “whether the expert’s opinion will aid the trier of fact.” Consol. Mech. Contrac ³⁷⁵ tors v. Ball, 263 Md. 328, 338 , 283 A.2d 154 (1971) (citations omitted).

In the case sub judice, it is undisputed that the determination of whether a lease is structured as capital or operating and how that will affect a corporation’s financial status is complex and beyond the knowledge of the average layman. Olwell’s testimony was relevant because it was evidence that Saturn clearly was not required to lease the computer equipment from Rosepoint at a twenty percent markup and, because of this, Yost was not acting as an ordinarily prudent director in these transactions. We find that the court did not err when it admitted this testimony because Olwell’s opinions were an aid to the jury. Next, appellant Yost contends that Exhibit No. 91, which is a four page list of numerous equipment leases and Olwell’s opinion as to whether each is an operating or capital lease, was improperly admitted.

Appellant Yost again contends that Olwell was unqualified to render his opinion. We remain unpersuaded by this argument. As with Olwell’s testimony, Exhibit No. 91 was an aid to the jury’s determination of whether Yost violated Md.Corps. & Assoc.Code Ann. § 2-405.1 and, therefore, it was properly admitted. Finally, appellant Yost contends that the court did not allow him to cross-examine Olwell on his qualifications with regard to accepted accounting procedures prior to the admission of Exhibit No. 91.

Appellee Early elicited Olwell’s qualifications and presented him as an expert in “computer leasing.” Yost objected and the court overruled the objection. Yost did not request to voir dire or otherwise examine Olwell, who then testified about computer lease agreements. Appellee Early subsequently moved for admission of Exhibit No. 91. Yost objected on the basis that Olwell was not an expert on the necessary accounting methods and the court sustained the objection.

Olwell testified that he was familiar with the accepted accounting procedures that are used to test whether a lease is operating or capital, stated the general rules of the test, and ³⁷⁶ testified that he used these accepted accounting procedures to determine whether the lease agreements between Saturn and Rosepoint were capital or operating. Appellee Early again moved for admission of Exhibit No. 91 and the following exchange occurred: Mr. Kim: Your Honor, I do believe that Mr. Olwell has shown familiarity with FASB 13 [accepted accounting procedures] and the application of the FASB 13. Mr. May: I object. I’d like to cross-examine.

The Court: You’ll have a chance to do that. We’ll admit it subject to cross. The Deputy Clerk: 91. (Plaintiff’s No. 91 previously marked for identification was received into evidence.) The Court: Have you any further questions?

Mr. Kim: No, Your Honor. Yost then declined to cross-examine Olwell. Yost clearly had the right to cross-examine Olwell on his knowledge of the necessary accounting procedures prior to the admission of Exhibit 91. The fact that he did not do so after its admission does not provide us with any basis to hold that the court erred in finding that Olwell’s qualifications were sufficient to provide a basis for the admission of the exhibit.

See Beahm, 279 Md. at 330 , 368 A.2d 1005 (“[I]t is firmly established that the complaining party has the burden of showing prejudice as well as error.” (Citations omitted)). The court’s error in not permitting cross-examination did not affect the outcome of the case and, therefore, it is harmless. I.W. Berman Prop. v. Porter Bros., 276 Md. 1, 12 , 344 A.2d 65 (1975) (citing Master Royalties Corp. v. Mayor & City Council of Baltimore, 235 Md. 74, 96 , 200 A.2d 652 (1964)). Moreover, we cannot find from the record before us that the trial court abused its discretion in permitting the introduction of the exhibit based on Olwell’s qualifications.

See Radman, 279 Md. at 173 , 367 A.2d 472 . ³⁷⁷ II. Yost next contends that the court erred when it denied his motion for judgment on Count 3, which alleged that he mismanaged Saturn’s affairs and wasted its funds when he executed the lease agreements with Rosepoint. We disagree. Count 3, in essence, alleged that Yost did not fulfill the requirements of Md.Corps. & Assoc.Code Ann. § 2-405.1(a) (1990) which provides: (a) In general. — A director shall perform his duties as a director, including his duties as a member of a committee of the board on which he serves: (1) In good faith; (2) In a manner he reasonably believes to be in the best interests of the corporation; and (3) With the care that an ordinarily prudent person in a like position would use under similar circumstances.

The Attorney General has interpreted § 2-405.1 to be a codification of the business judgment rule, Savings and Loan Associations, 62 Op.Att’y Gen. 804, 811-12 (1977), which is a “presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company.” Aronson v. Lewis, 473 A.2d 805, 812 (Del.1984) (quoted with approval in Hanks, Maryland Corporation Law § 6.8, at 172 (1990)). A director is presumed to act in good faith, Zimmerman v. Bell, 800 F.2d 386, 392 (4th Cir.1986) (interpreting Maryland law), and the court will not substitute its business judgment for that of the director. Devereux v. Berger, 264 Md. 20, 32 , 284 A.2d 605 (1972). Contrary to the opinion of the Attorney General, § 2-405.1 and the business judgment rule differ in that the former is the code of conduct for corporate directors, while the latter is an aid to judicial review.

See Maryland Corporation Law § 6.8, at 172, 174. Nevertheless, the two do overlap. For example, proof of the lack of good faith defeats both the presumption of ³⁷⁸ the business judgment rule and the requirements of § 2-405.1(a)(l). The better position is to view the business judgment rule as a presumption that corporate directors acted in accordance with § 2-405.1.

See Maryland Corporation Law § 6.8, at 174. Although § 2-405.1(a) sets forth the duties of a corporate director, subsections (b) and (c) impose a limitation upon director liability: (b) Reliance on information from others. — (1) In performing his duties, a director is entitled to rely on any information, opinion, report, or statement, including any financial statement or other financial data, prepared or presented by: (1) An officer or employee of the corporation whom the director reasonably believes to be reliable and competent in the matters presented; (ii) A lawyer, certified public accountant, or other person, as to a matter which the director reasonably believes to be within the person’s professional or expert competence; or (iii) A committee of the board on which the director does not serve, as to a matter within its designated authority, if the director reasonably believes the committee to merit confidence. (2) A director is not acting in good faith if he has any knowledge concerning the matter in question which would cause such reliance to be unwarranted. (c) Liability limited. — A person who performs his duties in accordance with the standard provided in this section shall have the immunity from liability described under § 5-348 of the Courts and Judicial Proceedings Article. 2 ³⁷⁹ Yost testified that he relied upon the advice of outside accountants and Saturn’s corporate attorney who advised him that certain leases that Saturn structured as operating leases were actually capital leases and that it was not in the best interest of the corporation to put the capital leases on the books of Saturn Corporation.

Yost further testified that it was obvious [that] it was impossible for us to run it as an operational lease, because we couldn’t afford the payments. So the — the original discussion was that we — that there would be an ABC corporation, or excuse me, an ABC partnership set up, or something, that later became the name Rosepoint Associates. Brian Topper, a certified public accountant and comptroller of Saturn, testified that outside accountants had determined that Saturn had entered into certain leases which were capital leases and, therefore, the total debt under the leases had to be recorded as a liability on Saturn’s financial statement. This would then limit Saturn’s borrowing power.

Based upon these discussions, Yost contends that he is shielded absolutely from liability as a corporate director by the provisions of § 2-405.1(b) and (c). We disagree and explain. We find no Maryland cases which have interpreted the relationship between the various subsections of § 2-405.1. In this, the initial interpretation of the statute, we must effectuate the intent of the legislature.

Katz v. Wash. Sub. San. Comm., 284 Md. 503, 513 , 397 A.2d 1027 (1979).

The beginning point of statutory construction is the plain language of the statute for this is the legislature’s final expression of its intended goal. Morris v. Prince George’s County, 319 Md. 597, 603 , 573 A.2d 1346 (1990). Furthermore, if the language of the statute is sufficiently ³⁸⁰ expressive of the legislative purpose or goal, we need go no further. Id.

A director’s reliance upon the competent information and advice of others, as set forth in § 2-405.1(a) and (b) is a defense to allegations that his or her performance did not meet the requirements of § 2-405.1(a). Therefore, in the case sub judice, Yost must present facts to support his claim that he relied upon the advice of outside