K & K Management, Inc. v. Lee

• Decision Date: 01 September 1987
• Docket Number: No. 145,145
• Parties: K & K MANAGEMENT, INC. et al. v. Chul Woo LEE et al. ,
• Court: Maryland Court of Appeals

Page 137

316 Md. 137

557 A.2d 965

K & K MANAGEMENT, INC. et al. v. Chul Woo LEE et al.

No. 145, Sept. Term, 1987.

Court of Appeals of Maryland.

May 16, 1989.

M. Albert Figinski (Arnold M. Weiner, Julie C. Janofsky and Melnicove, Kaufman, Weiner, Smouse & Garbis, P.A., all on brief), Baltimore, for appellants.

Oscar S. Gray and Larry S. Gibson (Michael B. Mitchell and Terrance W. Tankard, all on brief), Baltimore, for appellees.

Argued before MURPHY, C.J., and ELDRIDGE, COLE, RODOWSKY, McAULIFFE, ADKINS and BLACKWELL, JJ.

RODOWSKY, Judge.

Appellants, owners of a motel, contracted with the appellees to operate the motel's restaurant under a profit sharing lease. About two years later it appeared to the appellants that terminating the arrangement would be more efficient than continuing it. Appellants effected termination by locking out the appellees without notice. This strategy for maximizing value failed to consider all of the costs. When the dust settled after the resulting litigation, the appellees held judgments based on jury verdicts totaling $979,400 in compensatory and punitive damages for breach of contract, conversion, and malicious interference with business relationships. Acting through counsel who were not trial counsel, appellants have assigned numerous errors. The principal claim of error with which we agree, and which carries a price tag of $800,000, was permitting the jury to treat the breach of the contract between the parties as a tort.

Appellees, the plaintiffs, are Chul Woo Lee and his wife, So Ja Lee, who in 1970 came to this country with their three daughters from the Republic of Korea. Although both plaintiffs had bachelor's degrees, Mr. Lee initially worked here as a cook and Mrs. Lee was employed as a seamstress. In 1974 they opened a restaurant, the Seoul, in an apartment house on University Parkway in Baltimore City. The business was successful. Its menu of American and native Korean foods drew general patronage from the locality and among Korean-Americans from the greater metropolitan area. The Seoul Restaurant became the place for luncheon and dinner meetings of Korean organizations and for social functions within the Korean community. At the University Parkway location the Seoul Restaurant did not serve breakfast, had no off-street parking, and had no alcoholic beverage license.

The individual defendants, appellants Robert L. Kirby, Sr. (Robert Sr.) and his two sons, Robert L. Kirby, Jr. (Robert Jr.) and Phillip D. Kirby (Phillip), are in the business of operating motels. Their headquarters is in Northern Virginia. Each of the Kirbys owns one-third of the stock of the corporate defendant, appellant K & K Management, Inc., a Virginia corporation (K & K). K & K owns and operates Harbor City Inn, a 125 room, Baltimore City motel which is franchised as part of the Best Western chain. Harbor City Inn is on Russell Street, just north of I-95 and south of the Camden Industrial Park, in a neighborhood dominated by warehouses, gasoline stations, and a municipal refuse incinerator. Harbor City Inn has a restaurant, the public areas of which are a main dining room, a smaller room for private groups, and a bar. Prior to the contract between the parties to this case, a Maynard Meyers (Meyers) operated the motel restaurant but, by August 1981, he no longer planned to continue operating it.

In K & K's search for a successor to Meyers, Phillip visited the Lees' Seoul Restaurant and opened negotiations. K & K had to have a restaurant, particularly to serve breakfast. The Lees were attracted by off-street parking and by K & K's alcoholic beverage license. The negotiations resulted in a written contract between Mr. and Mrs. Lee and K & K, prepared by K & K, and dated August 12, 1981 (the Agreement).

Under the Agreement K & K granted the Lees the exclusive right to operate, and the Lees agreed to operate, the restaurant at Harbor City Inn for five years beginning August 15, 1981, with the option in the Lees to renew for two successive terms of five years each. K & K had the right to set "the general operating standards for the restaurant" in accordance with standards normally established by Best Western. The Lees agreed, "[s]ubject to the general control and standards of K & K," to "oversee and control all phases of the restaurant operation...."

For working capital the Lees furnished $20,000. This was deposited into an escrow account which required two signatures, one that of a representative of K & K and the other that of a representative of the Lees. K & K maintained the accounting records of the venture at its headquarters. As a financial control the Agreement called for an operating account, with the same signature requirement, into which all restaurant receipts were to be deposited and from which all restaurant expenditures would be made. In actual operation a third account was also established. Known as the management account, it seems to have been intended initially for cash purchases and it required only the signature of a person designated by the Lees. The amount from receipts to be deposited into the management account was subject to K & K's approval. We shall call both the operating account and the management account the "business accounts." ¹ Under the Agreement, the restaurant venture paid no rent to K & K but did pay $500 per month to K & K for utilities.

"If and to the extent that the cash flow of the restaurant operation [did] not cover the expenses thereof, such deficit [was to] be made up by a transfer of funds from the escrow account to the operating account." Any net proceeds which were "not reinvested to upgrade the facility" were to be paid eighty percent to the Lees and twenty percent to K & K. The Lees had the right to decide, at times and in amounts of their choosing, "to reinvest net profits or to withdraw net profits and distribute them[.]" If funds in the business accounts were "insufficient to cover all existing current and accrued expenses," the Lees were to transfer sufficient funds from the escrow account, and, if they failed to do so, K & K had the right immediately to terminate the Agreement.

K & K also had a right to terminate the Agreement on thirty days written notice by certified mail to the Lees if their operation did not meet the standards set, in accordance with the Agreement, by K & K. An option in K & K immediately to terminate was provided under paragraph thirteen, should the Lees "create any ... obligations or liability to K & K[.]" Paragraph three provided that, on termination, "[a]ny and all improvements made by [the Lees] become a part of and shall remain a part of the permanent restaurant facilities and may not be removed" by the Lees. Touching upon the same subject, paragraph seventeen in part stated that "[u]pon termination of this agreement, all improvements made to the property by [the Lees] shall revert to the ownership of K & K."

In addition to the $20,000 which the Lees placed in the escrow account, they also paid $15,000 over a period of time to Meyers, apparently for Meyers's relinquishment of whatever rights he had to continue to operate the restaurant and also for certain equipment left by Meyers.

In August 1981, when the Lees began operations at Harbor City Inn, the restaurant had a rundown appearance and was only skeletally equipped. Utilizing funds from the business accounts, or reimbursing themselves from the business accounts for charges against their personal credit, the Lees had the restaurant painted, replaced the draperies and carpeting, and purchased replacement and additional equipment and utensils for the kitchen and dining areas.

The Kirbys were sufficiently satisfied with the Lees' operation that, around January of 1982, they engaged Mr. Lee additionally to operate the restaurant in a motel which they owned in Falls Church, Virginia. The travel and separation from his family in Baltimore, however, were too taxing on Mr. Lee and the Falls Church arrangement was mutually rescinded.

The Lees had renamed the restaurant at Harbor City Inn the Seoul Restaurant. At that location the Seoul Restaurant continued to be the meeting place for Korean business and social functions and, due to its proximity to I-95, the restaurant drew Korean patronage not only from Baltimore but from the Washington, D.C. area as well.

The Agreement remained in effect from August 15, 1981, through September 6, 1983, when K & K breached it. During that time Mr. Lee worked twelve to twenty hours per day, seven days a week, without vacation. He received no salary from the business. Mrs. Lee and each of the three daughters worked in the venture, at least part time, for which they were paid wages. Total distributions of "profits" to the Lees over the life of the Agreement were approximately $28,800 and to K & K, $7,300. The $20,000 capitalization was entirely expended in operations and apparently was not reimbursed to the Lees prior to the 80/20 distributions.

What happened to the relationship between the parties was the subject of conflicting testimony consuming the better part of eight trial days. From the evidence most favorable to the plaintiffs the jury could find that the Lees ran a competent operation, that they were very hard working and eager to please, that the complaints voiced by K & K's Virginia management were largely based on information furnished by the K & K manager who was resident at Harbor City Inn, a Richard Dahlseid (Dahlseid), and that Dahlseid meddled in restaurant operations. ²

Among K & K's complaints about the Lees' operation, as documented in letters to Mr. Lee dated August 19, 1982, and October 29, 1982, were inadequate staffing at breakfast time, lack of fluency in English of those who seated and served customers, and failure to prepare group menus to permit competitive bidding for tour groups at prices combining accommodations and meals. On January 28, 1983, a Best Western inspector ate at the Seoul...