Bontempo ex rel. Quotient, Inc. v. Lare

• Decision Date: 06 August 2015
• Docket Number: No. 55, Sept. Term, 2014.,55, Sept. Term, 2014.
• Citation: 119 A.3d 791,444 Md. 344
• Parties: David S. BONTEMPO, Individually and on Behalf of Quotient, Inc. v. Clark J. LARE, et al.
• Court: Court of Special Appeals of Maryland

444 Md. 344

119 A.3d 791

David S. BONTEMPO, Individually and on Behalf of Quotient, Inc.

v.Clark J. LARE, et al.

No. 55, Sept. Term, 2014.

Court of Appeals of Maryland.

Aug. 6, 2015.

Geoffrey H. Genth (Steven M. Klepper, Catherine M. Manofsky, Kramon & Graham, P.A., Baltimore, MD), on brief, for Petitioner.

Niccolò N. Donzella (Baxter, Baker, Sidle, Conn & Jones, P.A., Baltimore, MD), on brief, for Respondents.

William J. Murphy (John J. Connolly, Zuckerman Spaeder LLP, Baltimore, MD), on brief, for Respondents.

Argued before: BARBERA, C.J.; HARRELL^* , BATTAGLIA, GREENE, ADKINS, McDONALD, and ALAN M. WILNER (Retired, Specially Assigned), JJ.

Opinion

McDONALD, J.

Under the Maryland General Corporation Law,¹ a minority shareholder of a closely held corporation who has been “oppressed” by those who control the corporation may ask a court of equity to dissolve the corporation. Many courts have measured oppression by looking to the “reasonable expectations” of minority shareholders at the time they join the venture. The Court of Special Appeals is one of those courts,² and now by virtue of this decision, so are we. Many courts in other jurisdictions—and the Court of Special Appeals, as well—have held that a court of equity may employ other equitable tools, short of dissolution, to remedy shareholder oppression. By virtue of this decision, so do we. This case requires us to consider the limit of those remedies when a minority shareholder, who also was an employee, seeks employment-related damages under the dissolution statute.

Petitioner David Bontempo, a minority shareholder in, and former employee of, Respondent Quotient, Inc., successfully proved in the trial court that he had been oppressed by Respondent Clark Lare, whose shares together with those owned by his wife Jodi Lare, also a Respondent, are the majority interest in Quotient. While the trial court ordered an accounting and awarded Mr. Bontempo damages, unpaid corporate distributions, and attorneys' fees, it declined to dissolve Quotient, to require Quotient to reinstate Mr. Bontempo as an employee, or to award other employment-related relief. In addition, the trial court was unpersuaded that the actions of Mr. Lare constituted fraudulent conduct meriting an award of punitive damages to Mr. Bontempo.

We hold that the measuring stick for “oppression” of a minority shareholder—the shareholder's “reasonable expectations” upon becoming an owner of the company—does not dictate the nature of equitable relief (short of corporate dissolution) that a trial court must impose. In fashioning relief, the trial court may properly take account of the viability of the corporation, and the impact of the relief on others associated with the corporation, including other shareholders, management, employees, and customers. Employment-related relief, such as pay-related monetary damages or a requirement that the corporation employ the minority shareholder, is unlikely to be appropriate in the absence of a written or oral employment agreement. We hold that the trial court in this case did not abuse its discretion in deciding on appropriate relief.

IBackground

A. Bontempo, the Lares, and Quotient Formation of Quotient

Mr. Bontempo and Mr. Lare worked together during the 1990s at Maxim Healthcare, a health care staffing company, in Chicago, Illinois. They shared the idea of running a business together. By the late 1990s, they had separately left Maxim and returned to the Baltimore–Washington area.

In 1999, Mr. Lare and his wife founded Quotient, a company that would recruit information technology professionals for placement as consultants at government entities and private employers. Ms. Lare was, and remained, employed as a pharmacist at Watermont Pharmacy (which she owned with her mother). The Lares initially operated Quotient out of their home and funded it with their personal savings and credit cards. A Stockholders Agreement dated November 15, 2000 recited the ownership of the company's shares by the Lares. Among other things, the Agreement also designated certain “triggering events” that would require a shareholder to sell (to the corporation or to the remaining shareholders) the shareholder's interest. Among the triggering events was termination of the shareholder's employment with Quotient “for good cause.”³

Mr. Bontempo joins Quotient as an Employee and Shareholder

Mr. Lare and Mr. Bontempo had stayed in touch, and Mr. Bontempo made a referral to Mr. Lare that resulted in a contract between Quotient and the United States Census Bureau. Soon thereafter, Mr. Bontempo himself joined Quotient as Vice–President of Business Development. Mr. Bontempo agreed to leave his $85,000 salary at another company to become a 45% shareholder in Quotient and draw a salary of $20,000 from the company beginning in February 2000. The parties did not enter into a written employment contract. It was understood that the Lares would continue to take no salary, and would adjust their ownership so that Mr. Lare owned 4% and Ms. Lare owned 51% of the shares (apparently an effort to qualify for government contracting preferences for woman-owned and managed small businesses). The Circuit Court later found that the parties had essentially entered into a “handshake deal” under which Mr. Bontempo would join the company, but without an employment contract that set out any particulars of his employment.

In early 2001, the parties formalized the arrangement to a certain extent. In January 2001, the Lares and Mr. Bontempo executed an attachment to the Stockholders Agreement in which Mr. Bontempo assented to the terms of the earlier Agreement. Minutes of a contemporaneous board meeting stated that Mr. Lare had transferred stock to Mr. Bontempo “in recognition of his efforts on behalf of the Corporation since becoming an employee of the Corporation.” Coincident with the transfer of shares to him in March 2001, Mr. Bontempo also signed a promissory note to Mr. Lare in the amount of $46,800 to be paid in installments over a five-year period. The parties later differed on the purpose of the note, although they agreed that it was related to the stock transfer. Mr. Bontempo testified that the note was never meant to be repaid, but was simply an “accounting record” and that he executed it for the company's books when he received his shares. Mr. Lare testified that Mr. Bontempo was expected to repay the note. It was undisputed that Mr. and Ms. Lare reported a capital gain as a result of the note and had paid approximately $12,000 in taxes on that gain. Mr. Bontempo never made a payment on the promissory note.

In December 2001, the Lares began to draw a salary from the company. Mr. Bontempo testified that he had an oral agreement with the Lares that his salary would match the Lares' combined salaries, once they started to take a salary, but the Lares contended that there was no such agreement. The trial court found that there was not “a meeting of the minds” on this issue and that it was not part of any employment agreement. In fact, over the 10–year period that Mr. Bontempo spent as an employee of Quotient, Mr. and Ms. Lare's combined salaries roughly equaled Mr. Bontempo's salary for approximately four years, while the salaries were significantly different in both the early and later years of his employment.

In 2004, the Lares and Mr. Bontempo executed an Amended and Restated Stockholders Agreement (ARSA), which acknowledged Mr. Bontempo as a 45% owner, noted that he had owned the shares since 2001, and made other minor changes not relevant here. Mr. Bontempo had not contributed any capital to Quotient.

At first, both Mr. Bontempo and Mr. Lare focused on acquiring business for Quotient. As the company grew, Mr. Bontempo focused on sales and client relationships, and Mr. Lare focused on executive management and operations. At the time of trial in 2011, the parties agreed that Jodi Lare had not been involved in Quotient for four or five years.

The company eventually qualified for a General Services Administration (“GSA”) schedule, which significantly improved its ability to obtain federal government contracts. The Circuit Court found that Mr. Bontempo had a critical role in obtaining certain government contracts for the company. The company added more employees, moved into its own office space, and relocated several times to accommodate its growth.

Personal Expenses Paid by Quotient

As Quotient grew, the company paid for various personal expenses for both the Lares and the Bontempos, including cell phones, vehicles, and automobile insurance. Quotient purchased a late model SUV and provided a cell phone and credit card for Mr. Bontempo's wife, who never had any role in the company. Both the Bontempos and the Lares used company credit cards for personal expenses, including gas, meals, and entertainment. Mr. Bontempo testified that he would reimburse the company for personal expenses if Mr. Lare asked him to do so.

Beginning in 2007, Mr. Lare approached Mr. Bontempo about making short-term interest-free loans to Watermont Pharmacy, the pharmacy where Jodi Lare worked and was part-owner. Mr. Bontempo approved those loans but, according to Mr. Bontempo, he was not aware that Quotient funds continued to be used for short-term loans to Watermont for several years beyond the loans he had approved. In 2006, the Lares placed their household employees on Quotient's payroll,⁴ and company funds were used to pay for the Lares' personal trainers and personal legal fees (for a dispute not related to this litigation). Quotient also made short-term interest-free loans to Broadway Equities, LLC, a company formed by Mr. Lare and his brother to purchase real estate in Cape May, New Jersey. The Circuit Court found that Quotient's financial statements did not reflect the loans.

In December 2007, the Lares borrowed more than $200,000 from Quotient in connection with a renovation of their home. The note that they provided to the company in connection with that...