American Metal Forming Corp. v. Pittman, Civ. A. No. HAR 91-612.
| Decision Date | 06 January 1992 |
| Docket Number | Civ. A. No. HAR 91-612. |
| Parties | AMERICAN METAL FORMING CORP., Plaintiff, v. W. David PITTMAN, Jr., et al., Defendants. |
| Court | U.S. District Court — District of Maine |
Aron U. Raskas and James P. Ulwick, Baltimore, Md., and Janet M. Nesse, Washington, D.C., for plaintiff American Metal Forming Corp.
Roger Schlossberg, Hagerstown, Md., Trustee of the assets of the estate of Pittcon Industries, Inc.
Michael E. Marr, Baltimore, Md., for defendants W. David Pittman, Jr. and Patrice Kelley Pittman.
The Court has conducted a bench trial in the above-referenced case. Pursuant to agreement between the parties, trial by jury has been waived as to those counts permitting trial by jury. Plaintiffs, American Metal Forming Corporation ("American"), and Roger Schlossberg, Trustee of the assets of the estate of Pittcon Industries, Inc., have brought this action to recover money damages and to obtain equitable relief as a result of actions allegedly taken by David Pittman, Jr. and Patrice Kelley Pittman ("the Pittmans").
David Pittman ("Pittman") was the President and sole shareholder of Pittcon Industries, Inc. ("Pittcon"), a company engaged in the manufacture of woods, metals, drywall, and finishings. As such, Pittman exercised absolute control over Pittcon and was responsible for all of its actions. On May 23, 1988, Pittcon filed a voluntary petition for bankruptcy under Chapter 11. On January 13, 1989, the Court appointed Roger Schlossberg as Trustee to run the affairs of Pittcon. In the fall of 1989, the bankruptcy court approved a plan by American to purchase the assets of Pittcon. Plaintiffs bring this action on grounds that several transactions were entered into by the Pittmans while acting as officials for Pittcon, for their personal gain, and to the detriment of Pittcon.
The first transaction involved an industrial revenue bond ("IRB")1 transaction entered into by the Pittmans on September 23, 1980. The evidence shows that Pittman, as President of Pittcon, decided that the Corporation should expand, and needed additional space. It is clear to the Court that Pittman was acting as President of Pittcon when he came across a property located at 6409 Rhode Island Avenue, in Prince George's County, Maryland. Citizens Bank of Maryland ("Citizens Bank") owned the property and agreed to sell the building to Pittman, who purchased it with IRB financing. The IRB provided to Pittman 100% financing of $563,000.00 at a very favorable interest rate (below the prime rate). Pittman also used the IRB to purchase certain equipment for use by Pittcon. Pittman admitted at trial that Pittcon had the need, the opportunity, and the financial ability to purchase the property and equipment. Nonetheless, the Pittmans purchased the property and equipment in their own name, but pledged the assets of Pittcon as security for the IRB transaction.
After the IRB transaction, the Pittmans leased the property and equipment to Pittcon under long term leases. The terms of the leases coincided with the length of the IRB loan. As a result, the Pittmans built up equity in the property, while Pittcon made lease payments to the Pittmans. The eventual result if the situation continued would be that at the end of the lease terms, the Pittmans would own the property and equipment free and clear, and Pittcon would have to renegotiate with the Pittmans for new leases or go elsewhere to obtain the necessary property and equipment.
Mr. Edward Dahlka, Jr., the President of a major leasing business with twenty-one years experience in the field, stated that the rate the Pittmans charged Pittcon on the equipment leases was almost three times the market rate. (See Plaintiff's Exhibits 300, 301). Further, the evidence shows that Pittcon was responsible for paying the taxes, utilities and repairs, while Pittman enjoyed the tax benefits incident to the ownership of the premises and equipment.
The second transaction at issue involved another IRB transaction entered into by the Pittmans on November 24, 1985. Pittman stated that Pittcon once again needed to expand into new space. The evidence at trial revealed that Pittman, acting as President of Pittcon, came across property suitable for Pittcon at 6501 Rhode Island Avenue, Prince George's County, Maryland. The Pittmans used the IRB funds to acquire and to refurbish 6501 Rhode Island Avenue, and to acquire certain equipment for use by Pittcon. The Pittmans placed these assets in their own name. Again, in order to secure the loan, the Pittmans pledged a security interest in all of the assets of Pittcon, this time to Maryland National Bank, for the amount of $2.2 million. As was the case with the first IRB transaction, the evidence disclosed that Pittcon had the desire and ability to purchase the property and equipment in its own name, without the Pittmans.
After this transaction, Pittman again leased the property and equipment to Pittcon under long term leases, which again coincided with the length of the mortgage. Here, both the rent on the property and equipment exceeded the fair market value of the premises and equipment. The lease of the 6501 property contained an escalation clause of 8% per year, which the evidence shows was at least double the market rate. Mr. Ronald Lipman, a real estate consultant who is an expert with regard to the appraisal and rental values of commercial real estate properties, prepared a market rent analysis of the 6501 property. Lipman found that the rent for the property "is substantially above market by approximately $2.00./sq.ft. and the annual increases imposed by the terms of the lease at 8% far outstrip the market's willingness to pay such increases." Lipman concluded that "the lease for 6501 Rhode Island Avenue was negotiated at an above market level at the point in time it was struck." (Plaintiff's Exhibit 226, at 3.) The Court finds that the lease on the 6501 property was as stated by Mr. Lipman in his analysis. (Plaintiff's Exhibit 226). Mr. Dahlka stated that the rate Pittman charged Pittcon on the equipment leases was almost three times the market rate. (As stated in exhibits 300 & 303).
In addition, Pittcon was responsible for paying the taxes, utilities and repairs on the property.2 As a result, the Pittmans built equity in the premises and equipment using the lease payments from Pittcon, profited from the lease payments by Pittcon, and enjoyed the tax benefits incident to ownership.
The Pittmans' own accountant, Mr. Robert Hauck, stated at trial that looking at the corporate interests alone, it would have been better for the corporation to own the properties than to lease them from the Pittmans. Mr. Stanley Burns, an expert in the field of commercial banking and bank loans stated that, having looked over many loan portfolios in his work, Pittcon could have obtained the IRB loans to purchase the properties and equipment on its own under the same terms that the Pittmans obtained for themselves. In fact, Pittman himself testified that he assumed Pittcon could have done so.
Plaintiffs argue pursuant to Counts II and III of the Complaint that they are entitled to a constructive trust on the buildings and equipment to which the Defendant took title and then leased back to the Corporation. Counts II and III are premised on different theories under which a Plaintiff is entitled to a constructive trust.
"A constructive trust is the remedy employed by a court of equity to convert the holder of the legal title to property into a trustee for one who in good conscience should reap the benefits of the possession of said property." Wimmer v. Wimmer, 287 Md. 663, 668, 414 A.2d 1254, 1258 (1980). The Court finds that a constructive trust is the appropriate remedy under both theories asserted by Plaintiffs.
Under the first theory, pursuant to Count II, there must be "an acquisition of property in which another has some good equitable claim." Wimmer at 671, 414 A.2d 1254. This requirement is satisfied because the Pittmans acquired legal title to property and equipment in which the Trustee and American, as successors to Pittcon Industries, Inc., have equitable claims. American purchased all of Pittcon's assets, including all of its causes of action.
"The remedy is applied by operation of law where property has been acquired by fraud, misrepresentation, or other improper method, or where the circumstances render it inequitable for the party holding the title to retain it." Wimmer, at 668, 414 A.2d 1254. Further, "there must be clear and convincing evidence not only of wrongdoing, but also of the circumstances which render it inequitable for the holder of the legal title to retain the beneficial interest." Wimmer, at 668, 414 A.2d 1254.
Clear and convincing evidence presented at trial shows that Pittman, as President of Pittcon, owed a fiduciary duty to the Corporation. Further, the Court finds that Plaintiffs have proven by clear and convincing evidence that Pittman breached his fiduciary duty by engaging in both the IRB transactions and the subsequent lease agreements for his own personal benefit and to the detriment of Pittcon. The purchase of the properties and equipment were clearly corporate opportunities which Pittcon could have purchased on its own under the same favorable terms Pittman obtained for himself. Pittman came across those opportunities as President of Pittcon, and usurped the corporate opportunities for himself. He also breached his fiduciary duty to Pittcon when he caused Pittcon to enter into leases with himself at above the market rate on the property at 6501 Rhode Island Avenue and the equipment. As such, it would be inequitable for Pittman to retain legal title to the properties.
With regard to Count III, Plaintiff asserts that a constructive trust is the appropriate remedy under a confidential relationship theory. There must be "an acquisition of property in...
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