Boland v. Boland

• Decision Date: 18 November 2011
• Docket Number: Nos. 123,129,2010.,Sept. Term,s. 123
• Parties: John L. BOLAND, et. al. v. Sean F.X. BOLAND, et al.John L. Boland, et. al. v. Boland Trane Associates, Inc., et. al.
• Court: Maryland Court of Appeals

31 A.3d 529

423 Md. 296

John L. BOLAND, et. al.

v.Sean F.X. BOLAND, et al.John L. Boland, et. al.

v.Boland Trane Associates, Inc., et. al.

Nos. 123

129

Sept. Term

2010.

Court of Appeals of Maryland.

Oct. 31, 2011.Reconsideration Denied Nov. 18, 2011.

Joseph P. Suntum (Miller, Miller & Canby, Chtd., Rockville, MD), on brief, for petitioners in No. 123, Sept. Term, 2010.

Michael F. Flynn, Jr. (Erin Schiesel of Gleason, Flynn, Emig & Fogleman, Chtd., Rockville, MD), on brief; John M. Quinn (Michael J. McAuliffe of Ethridge, Quinn, Kemp, McAuliffe, Rowan & Hartinger, Rockville, MD), on brief, for respondents in No. 123, Sept. Term, 2010.

Joseph P. Suntum (Miller, Miller & Canby, Chtd., Rockville, MD), on brief, for appellants in No. 129, Sept. Term, 2010.Michael F. Flynn, Jr. (Erin Schiesel of Gleason, Flynn, Emig & Fogleman, Chtd., Rockville, MD), on brief; John M. Quinn (Michael J. McAuliffe of Ethridge, Quinn, Kemp, McAuliffe, Rowan & Hartinger, Rockville, MD), on brief, for appellees in No. 129, Sept. Term, 2010.Argued before BELL, C.J., BATTAGLIA, GREENE, ^* MURPHY, ADKINS, BARBERA, and JOHN C. ELDRIDGE (Retired, Specially Assigned), JJ.ADKINS, J.

These appeals involve two lawsuits, which include a derivative claim and a direct shareholder action, both arising from a series of stock transactions in a family business owned primarily by eight siblings. Out of those siblings, three brothers served as directors and officers of two family corporations, while the other five siblings were not actively involved in their management. After the death of one of the sisters, the corporations attempted to repurchase her stock pursuant to the terms of a Stock Purchase Agreement. The sister's estate refused on the grounds that the Agreement grossly undervalued the estate's shares. The corporations filed a declaratory judgment action, seeking enforcement of the Stock Purchase Agreement, and named the other, non-director siblings as defendants and interested parties.

Meanwhile, the non-director siblings had learned of an earlier stock transaction in which the three directors had acquired additional corporate stock for themselves. Aggrieved by this transaction, two of the non-director siblings sent a demand for litigation to the corporation, and shortly thereafter filed a derivative action in the Circuit Court for Montgomery County, alleging self-dealing and a breach of fiduciary duty.¹ They also filed “direct” claims, as cross-claims in the declaratory judgment action, on related grounds to the derivative action.

In response, the corporations appointed a special litigation committee (“SLC”), consisting of two newly hired “independent directors,” to examine the claims. After an extended study, the SLC issued a report concluding that the stock transactions were legitimate and that the Stock Purchase Agreement was enforceable. The Circuit Court, deferring to the judgment of the SLC, granted summary judgment in favor of the corporations on the derivative action. In the declaratory judgment proceeding, the Circuit Court, relying on res judicata, dismissed the cross-claims and granted summary judgment to the corporation.

On appeal in the derivative action, the Court of Special Appeals upheld the Circuit Court's grant of summary judgment, agreeing that the SLC's report resolved that matter. The two non-director siblings sought certiorari from this Court, which we granted. See 417 Md. 500, 10 A.3d 1180 (2010). At the same time, we granted certiorari in the declaratory judgment action, which had been pending in the Court of Special Appeals. The questions presented for review in these two cases are as follows, rephrased for brevity and clarity: ²

1) In the derivative action, did the Circuit Court apply the correct standard of review when it analyzed the report of the Special Litigation Committee under the Business Judgment Rule and awarded summary judgment in favor of the Respondents, thus rejecting Petitioners' claim?

2) Are the Petitioners' “direct” claims, brought as cross-claims in the declaratory judgment action, precluded by res judicata or otherwise resolved by the Special Litigation Committee report?

3) In the declaratory judgment action, did the Circuit Court err in holding that the stock purchase agreements were enforceable and granting summary judgment to Respondents?

In the derivative action (Circuit Court Case # 282138–V, Appellate No. 123), we shall reject the Petitioners' suggestion that Maryland courts should apply their “independent business judgment” and review the SLC's substantive conclusions. Instead, we shall adhere to the business judgment rule as applied in Auerbach and limit the judicial investigation of an SLC report to the issues of whether the SLC was independent, acted in good faith based on facts, and followed reasonable procedures. Even under this more limited inquiry, however, we shall reverse the Circuit Court, as the court made an inadequate inquiry into the SLC's independence and the reasonableness of its procedures.

In the declaratory judgment action, (Circuit Court Case # 273284–V; Appellate No. 123) we shall affirm the Circuit Court's grant of summary judgment to the Respondents on the contract issue, because we agree that the Stock Purchase Agreement in this case was supported by adequate consideration and was enforceable. We shall, however, reverse the Circuit Court's grant of summary judgment with regard to Petitioners' cross-claims (the direct action). The court based its summary judgment solely on the grounds that the Petitioner's cross-claims were barred by the doctrine of res judicata because of its resolution in the derivative action. As we explain below, the resolution of a derivative claim is not necessarily a factual resolution of the merits of the claim, and the Petitioners stated a separate, individual cause of action regarding allegedly oppressive actions by the majority shareholders.

FACTS AND LEGAL PROCEEDINGS

1. The Boland Family Business

In the early 1960s, Louis Boland Sr., the patriarch of the Boland family, entered into a franchise agreement with the Trane Company to be its exclusive sales agent in the greater Washington, D.C., market. Boland established Boland Trane Associates (“BTA”), to sell and distribute Trane's heating, ventilation, and air conditioning equipment, and Boland Trane Services, Inc. (“BTS”), to handle services and repairs.³ Boland served as the chairman of the board and president of both corporations, and along with his wife, Maureen, owned all the stock in the companies.

During the 1960s, Boland ⁴ gave stock to each of his eight children: Colleen, Louis Jr., Sean, James, John, Kevin, Michael, and Eileen.⁵ Later, at Boland's request, each child signed a Stock Purchase Agreement (“SPA”), which restricted their rights regarding the stocks. Specifically, the SPA required the children to offer the stock to the corporations at book value before selling to anyone else, and provided for a corporate repurchase of the stock upon the death of any of the children at book value plus 25 percent. Mr. Boland died on September 7, 2003. Before his death, Boland had set out his desired succession plan in a “Letter of Instruction.” Pursuant to the terms of that letter, Sean became chairman of the boards and CEO of BTA and BTS, James became president and chief operating officer, and Louis, Jr. became executive vice president and chief marketing officer. The letter also directed Lawrence Cain to become senior vice president and the chief financial officer. At all times relevant in this case, Sean, James, and Louis Jr. served on the boards of BTA and BTS along with Cain.

Under the new management, BTS and BTA continued to be profitable. In 2004, the corporations issued almost $5 million in dividends to the shareholders, and in 2005, the dividends increased to almost $6 million.

2. The Stock Transactions

The dispute centers on a series of stock transactions, the first of which was a corporate repurchase of Mrs. Boland's stock. After Mr. Boland's death, Mrs. Boland owned a 20 percent share in BTS. Seeking to reduce her eventual estate for tax purposes, and to secure a more stable source of income, Mrs. Boland negotiated with BTS to exchange her stock in return for the purchase of an annuity. On June 25, 2004, she sold her holdings in BTS back to the corporation, and the corporation purchased her an annuity which provided a monthly payment of $28,544.70 for life.

After the repurchase of Mrs. Boland's stock, the director siblings designed a series of stock purchases that would give them an increased share in BTA and BTS. First, in January 2005, BTS approved a sale of 75,075 shares to Sean's son, Sean Jr., and 151,150 shares to James, all at the price of $2.16 per share.⁶ Then, in April 2005, BTA approved a sale of 282 shares of BTA to Lawrence Cain, 70 shares to Sean Jr., 566 shares to James, and 282 shares to Louis Jr., all at a price of $508 per share.⁷

After these transactions, the Directors and Sean Jr. all had an increased ownership in the corporations. Sean Jr., who previously owned no stock in either corporation, now held just under 2 percent in each company. James increased his share of BTS by approximately 3 percent, and his share in BTA by 14 percent. Louis Jr. and Lawrence Cain each increased their share in BTA by approximately 7 percent. The boards approved the stock sales, retroactively, on April 4, 2005, at a meeting attended by Sean, James, Louis Jr., and Cain.⁸

The Board's stated purpose in approving these transactions was to compensate the corporations' directors and to increase their management share to a level comparable to similar corporations. The Board recognized a “need for management incentives for both short-term financial results as well as long-term growth of shareholder value[,]” and “acknowledged [that] it was most desirable to continue the employment of the [Directors] and adequately compensate them for their efforts and reward them...