Mas Assocs., LLC v. Korotki

• Decision Date: 08 August 2019
• Docket Number: No. 57, Sept. Term, 2018,57, Sept. Term, 2018
• Parties: MAS ASSOCIATES, LLC, et al. v. Harry S. KOROTKI
• Court: Court of Special Appeals of Maryland

465 Md. 457

214 A.3d 1076

MAS ASSOCIATES, LLC, et al.

v.Harry S. KOROTKI

No. 57, Sept. Term, 2018

Court of Appeals of Maryland.

August 8, 2019

Reconsideration Granted in Part and Denied in Part September 30, 2019

Argued by Peter S. Saucier (Alexander P. Berg, Kollman & Saucier, P.A. of Timonium, MD), on brief, for Petitioner.

Argued by Neal C. Baroody (Thomas O'Toole, Baroody & O'Toole of Baltimore, MD), on brief, for Respondent.

Argued before: Barbera, C.J., ^* Greene, McDonald, Watts, Hotten, Getty, Sally D. Adkins (Senior Judge, Specially Assigned) JJ.

Adkins, J.

Those who run small businesses must engage in the complex concerns competing for attention that will affect the bottom line. They have little time to focus on the legal structure of their business entity, and often even less interest in doing so. But the need for clarity regarding legal structure and financial relations between parties can become acute, and business people who ignore these needs live to regret ignoring their lawyer's advice. This case can be viewed as either a business lawyer's nightmare—or a poster child for such lawyer's public relations messaging.

Today we examine the dealings of three men engaged in mortgage lending who, after initially recognizing the need for legal structure in their business relationship, failed to consummate plans for acquiring membership interests in a long-existing Limited Liability Company—and the unfortunate fall-out from that failure. The question presented is whether competent material evidence exists in the record to support the trial court's conclusion that the parties intended to form a general partnership.¹ We conclude that the evidence cannot sustain the simultaneous intent to form both an LLC and a partnership, and Respondent failed to provide competent material evidence demonstrating intent to form a partnership. Thus, we reverse the trial court's determination.

FACTUAL OVERVIEW AND PROCEDURAL POSTURE

Factual Background

Three Separate Entities

Harry Korotki ("Harry"),² the plaintiff in the trial court, has worked in the mortgage industry in various capacities since 1991. In 1999, after the company he worked for suffered a "financial crisis," Harry had to "start over" and opened Savings First Mortgage, LLC with another individual. In 2002, this individual dissociated from Savings First, and Harry became the sole owner. By 2009, business was "very challenged," with banks "not as liberal with [credit] lines," which resulted in it becoming more difficult for "loan officers to go out and sell loans," and thereby negatively impacting profitability.

Joel Wax ("Joel"), a defendant in the trial court proceeding, was the sole owner of Greentree Mortgage Corporation. Greentree also experienced "economic difficulties" beginning around 2009.

Mark Greenberg ("Mark"), also a defendant, had also been in the mortgage industry for a significant amount of time. In 1999, after working for various other mortgage companies, Mark and his wife, Saralee Greenberg ("Saralee"), started MAS Associates, LLC ("MAS"). Saralee became a member of MAS, with a controlling 91% share of interest, and Mark became the manager and CEO and held no ownership interest. MAS was involved in three different lines of business: originating home purchase and refinancing loans, selling home improvement loans, and servicing high-risk loans. MAS was also struggling with business losses in 2009.

Initial Conversations About Combining Entities

In August 2009, with both of their businesses losing money, Harry and Joel engaged in negotiations with the intent to merge their companies and increase profitability. At one point, Joel mentioned drafting a "partnership agreement" and it seems the parties anticipated sharing profits, with Harry stating that "50% of what we can generate together is a whole lot more money that [sic ] 100% of what we are making individually." During these conversations, Joel also stated that, "as partners," he "agree[d] that everything should be equitable."

Nevertheless, Harry and Joel's planned merger was put on hold when, in September 2009, Ken Venick ("Ken"), a member of MAS Associates, LLC who held a 9% share of interest, and Mark, expressed interest in "getting involved" in the merger. While Saralee never authorized Mark to sign for her regarding ownership decisions nor did she give him power of attorney, he "represented [her] full interests" in the management of MAS. Under this newly proposed scenario, it was suggested that Equity Mortgage Lending, a registered tradename for MAS Associates, LLC, was the optimal entity for "everyone to fall into ...." The parties concluded that Equity Mortgage Lending was the ideal surviving entity because it had a "good track record" in the industry and fewer "legacy liabilities."

The four men then embarked anew on discussions regarding how their three companies might sensibly "merge as one business" and the potential ramifications of such an action. A September 30, 2009 letter from Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC ("Gordon Feinblatt"), a law firm serving as "regulatory counsel" to all three entities, described this plan as one "to join forces and establish a business together in some to-be-determined manner." As part of this initial effort, Harry sent an October 1, 2009 email to a large mortgage loan originator seeking to apply for a warehouse credit line³ for Equity Mortgage Lending. Harry characterized his interest in this new association as being a "[one-third] owner along with two other partners."

Attempt to Become Members of MAS Associates, LLC

Harry, Joel, and Mark held a meeting on October 13, 2009 to discuss their proposed business structure. They were joined by Elliott Cowan ("Cowan") and Marjorie Corwin ("Corwin"), the regulatory attorneys from Gordon Feinblatt, who had taken on the task of creating a "neutral" draft of the parties' business arrangement. After the meeting, Cowan prepared and circulated a summary of the meeting for review by Harry, Joel, Mark, and their personal legal representatives. This document represents the first unambiguous indication that Harry, Joel, and Mark intended to become members of MAS Associates, LLC, d/b/a Equity Mortgage Lending, replacing Saralee and diminishing Ken's ownership percentage.

During the meeting, the parties discussed the "goal" of ownership in MAS, and contemplated ownership percentages consisting of Harry at 33 1/3%, Joel at 33 1/3%, Mark at 30 1/3%, and Ken at 3%. Functionally, this would mean that Saralee, and to a lesser degree Ken, would transfer their interest in MAS to Mark, who would in turn transfer membership interest to Harry and Joel. The MAS Associates, LLC Amended and Restated Operating Agreement, adopted in April 2004 ("2004 Operating Agreement"), controlled the operation of MAS during this time. According to Section 9.1 of the 2004 Operating Agreement, such a transfer required a majority vote of the members.

The summary of the meeting indicated that the potential arrangement structured the deal into an "Interim Period" and a "Post-Interim Period." During the Interim Period, Harry and Joel were to be "employees of the Company" subject to for-cause termination and "entitled to receive W-2 compensation equal to 1/3 of the profits of the ‘origination division’ of the Company ...." Their respective companies—i.e., Savings First and Greentree—were to be liquidated and their mortgage lending licenses surrendered. Significantly, the parties never discussed "what would happen if the conditions for Harry and Joel to obtain substantial ownership [were] not obtained by the end of the Interim Period." According to Joel, the Interim Period was intended to be a time during which transitional issues, such as licensing and operations, could be ironed out.

In November 2009, Equity Mortgage Lending arranged to purchase much of Savings First's physical inventory. The parties also made plans to combine staff, and, in December 2009, they moved under one roof. During this time, Saralee authorized Harry, Joel, and Mark to be signatories on five Equity Mortgage Lending bank accounts. The Bank of America paperwork formalizing this transaction denotes Mark as MAS's President and lists both Harry and Joel as Vice Presidents. Harry, Joel, and Mark also agreed to split the legal fees incurred as a result of combining their companies.

On November 25 and 27, 2009, Cowan emailed new drafts of the agreements to Harry, Joel, Mark, and their respective attorneys. The first document, which Cowan termed the "definitive agreement," outlines the interim period, before Harry, Joel, and Mark were to become members. We will refer to this agreement as the Interim Agreement. The second document—which we term the Operating Agreement Outline—contemplates each of the parties' obligations post-membership.

This draft of the Interim Agreement, similar to the provisions outlined in the initial meeting summary, provided that, as of November 30, 2009, Savings First and Greentree would surrender their licenses and discontinue originating loans and that Harry and Joel would be employees of the company for the "duration of the Approval Period." Again, the agreement stated that Harry and Joel were "entitled to receive W-2 compensation"; "one-third (1/3) of the total economic benefits enjoyed in the aggregate by Mark, Saralee, Ken, Harry, and Joel"; equivalent benefits; and "commission splits on loan originations."

The nature of the parties' relationship to MAS d/b/a Equity Mortgage Lending during this interim period is central to the litigation. Harry characterizes their association as a partnership. And it is true that, at various times via email and in other documents, the parties referred to each other as partners, and Harry's description of the parties as partners regularly went unchallenged. Still, during his testimony, Joel described himself as an "employee of MAS Associates." In fact, he understood that one of the reasons Harry and he were employees, and...