Baa v. Acacia
| Decision Date | 27 July 2007 |
| Docket Number | No. 19, September Term, 2006.,19, September Term, 2006. |
| Citation | 400 Md. 136,929 A.2d 1 |
| Parties | BAA, PLC, et al. v. ACACIA MUTUAL LIFE INSURANCE COMPANY, et al. |
| Court | Court of Special Appeals of Maryland |
Argued before BELL, C.J., RAKER, WILNER, HARRELL, BATTAGLIA, GREENE, ELDRIDGE and JOHN C. (Retired, Specially Assigned), JJ.
The principal issue in this case is whether Maryland's statutory accountant-client privilege1 recognizes an exception for fraud in an action under the Maryland Uniform Fraudulent Conveyance Act.2 The case also presents the issues of whether the accountant-client privilege was waived and whether goodwill may be considered an asset in assessing an entity's solvency under the Maryland Uniform Fraudulent Conveyance Act.
BAA, plc ("BAA") and World Duty Free, plc ("World" or, collectively, "BAA"), petitioners and cross-respondents, argue that no such fraud exception to the accountant-client privilege exists because the statutory enumeration of exceptions does not include a fraud exception. In addition, BAA asserts that the Court of Special Appeals erred when it concluded that the word "assets" in the Fraudulent Conveyance Act does not encompass goodwill.
The respondent and cross-petitioner corporate investors (the "Noteholders") are creditors of Duty Free International which was a subsidiary of BAA.3 The Noteholders contend that, like the common law attorney-client privilege, the accountant-client privilege contains a fraud exception, and that the exception encompasses "fraud" within the meaning of the Fraudulent Conveyance Act. The Noteholders also assert that BAA waived the accountant-client privilege, thereby entitling the Noteholders to discovery of the accountant's work papers. Furthermore, the Noteholders argue that the Court of Special Appeals correctly held that goodwill should not be considered an asset because Duty Free's goodwill had no present fair market value.
We shall hold that the accountant-client privilege does not recognize an exception for fraud in an action under the Fraudulent Conveyance Act. In addition, we shall reject the Noteholders' waiver arguments. We shall also conclude that goodwill may be considered an asset in analyzing solvency under the circumstances presented in this case.
BAA, the corporate successor of the British Airport Authority, owns and manages airports, airport retail ventures, and many related businesses, including duty-free shops. World is a wholly owned subsidiary of BAA, and is a holding company for BAA's duty-free businesses around the world. In 1994, Duty Free was a publicly traded Maryland corporation in the business of selling duty-free goods at international airports and other locations. Duty Free issued $115 million in notes in 1994 to raise capital for its operations. The notes paid interest at the rate of 7 percent, in semi-annual installments, with the principal obligation on the notes becoming due in January 2004. The respondents/cross-petitioners, the Noteholders, purchased $109,235,000 of the notes issued by Duty Free.4
In 1997, BAA purchased all of the outstanding stock of Duty Free for $24 per share. To effectuate the acquisition of Duty Free, BAA formed a new company, W & G Acquisition Corporation ("W & G"), as a subsidiary of World. BAA made a noninterestbearing loan to World of $662 million. In turn, World provided W & G with $225 million in equity capital, and turned over the remaining $437 million to W & G in the form of an interest bearing promissory note. W & G used the combined $662 million (the "Acquisition Debt") to purchase Duty Free's stock. W & G and Duty Free were then merged, with the result that Duty Free (the entity surviving the merger) became liable to BAA for the Acquisition Debt.
By June of 2000, BAA decided to sell Duty Free. BAA hired the accounting firm of Deloitte & Touche to prepare an audit of Duty Free's financial condition. BAA entered into negotiations for the sale of Duty Free with businessmen Simon Falic, Leon Falic, and Jerome Falic, who were brothers. The Falics hired the accounting firm of Arthur Andersen, LLP, to investigate Duty Free's assets. Arthur Andersen contacted Deloitte & Touche to review various work papers and documents prepared in connection with the latter's audit of Duty Free. Deloitte & Touche contacted Duty Free and BAA for permission to disclose the work papers and documents. BAA granted permission on the condition that the Falics and Arthur Andersen sign a confidentiality agreement regarding the information obtained from the review of the working papers. The Falics and Arthur Andersen agreed to this condition and signed the confidentiality agreement.
In August 2001, BAA reached an agreement in principle with the Falics for the sale of Duty Free, at a purchase price of $175 million, with the Falics assuming the $115 million obligation on the 1994 notes and paying the remaining $60 million in cash. The effect upon travel-related business resulting from the terrorist attacks on September 11, 2001, however, substantially impacted the value of Duty Free. Furthermore, there apparently may have been some misunderstanding among the parties concerning the August 2001 tentative agreement. Consequently, the Falics reduced their offer to $6 million, structured such that $5,999,999 was allocated to repayment of a portion of the balance of the Acquisition Debt and $1.00 was paid for Duty Free's stock. BAA accepted the Falics' offer, and a Purchase Agreement was entered into. Under the Purchase Agreement, the Falics did not personally assume the obligation under the 1994 notes, but the obligation remained with Duty Free.
In April 2002 the Noteholders filed, in the Circuit Court for Anne Arundel County, this action against BAA, World, Duty Free and the Falics. The Noteholders' complaint, as amended, contained three counts alleging "Violation[s] of the Maryland Fraudulent Conveyance Act," Code (1975, 2005 Repl.Vol.), §§ 15-201 et seq. of the Commercial Law Article.5 Other counts of the amended complaint asserted, inter alia, "Conspiracy," "Common Law Fraud" solely against BAA, and "Breach of Fiduciary Duty."6 The relief requested included "[s]etting aside the transfer of any property or assets conveyed between or among defendants," compensatory damages, punitive damages, and a declaratory judgment.
The plaintiffs also demanded a jury trial. Prior to the submission of the case to the jury, the plaintiffs withdrew the "conspiracy" count and the request for a declaratory judgment. Subsequently, they have indicated that their "claims" are limited to alleged violations of the Fraudulent Conveyance Act and "Breach of Fiduciary Duty."7
In essence, both in their amended complaint and at trial, the Noteholders contended that the various transactions involving Duty Free had been without fair consideration and had rendered Duty Free insolvent, thereby avoiding liability on the 1994 notes.8 More specifically, the Noteholders asserted that Duty Free's incurrence of the $437 million Acquisition Debt and the subsequent repayment of $187 million of that debt constituted fraudulent conveyances because of a lack of fair consideration and because they made Duty Free insolvent.
Prior to trial, the Noteholders had served a subpoena on Deloitte & Touche, seeking documents associated with Deloitte & Touche's audit of Duty Free. Some documents were produced and others were withheld based on the statutory accountant-client privilege set forth in Maryland Code (1974, 2006 Repl.Vol.) § 9-110 of the Courts and Judicial Proceeding Article. Section 9-110(b) states in pertinent part:
(1) The contents of any communication made to the licensed certified public accountant or firm by a client who employs the licensed certified public accountant or firm to audit, examine, or report on any account, book, record, or statement of the client;
(2) Any information that the licensed certified public accountant or firm, in rendering professional service, derives from:
(i) A client who employs the licensed certified public accountant or firm; or
(ii) The material of the client.
(c) Disclosures. — (1) A licensed certified public accountant or firm may disclose any data to another certified public accountant or firm that conducts a quality review.
(2) The disclosure permitted by paragraph (1) of this subsection:
(i) Does not waive the privilege required by subsection (b) of this section; and
(ii) Subjects a licensed certified public accountant or firm that conducts a quality review to the same duty of confidentiality applicable to the licensed certified public accountant or firm undergoing the quality review.
(d) Exceptions. — The privilege against disclosure required by subsection (b) of this section does not affect:
(1) The bankruptcy laws;
(2) The criminal laws of the State; or
(3) A regulatory proceeding by the State Board of Public Accountancy under §§ 2-317 and 2-412 of the Business Occupations and Professions Article."
After the refusal to produce certain documents, the Noteholders filed in the Circuit Court a motion to compel production, stating that a "fraud exception" to the accountant-client privilege had been recognized by the Court of Special Appeals in Dixon v. Bennett, 72 Md.App. 620, 531 A.2d 1318 (1987), cert. denied, 311 Md. 557, 536 A.2d 664 (1988), and that the exception was...
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