Kramer v. Liberty Property

• Decision Date: 23 March 2009
• Docket Number: No. 23, Sept. Term, 2008.,23, Sept. Term, 2008.
• Citation: 408 Md. 1,968 A.2d 120
• Parties: Richard L. KRAMER v. LIBERTY PROPERTY TRUST f/k/a Republic Property Trust.
• Court: Court of Special Appeals of Maryland

968 A.2d 120

408 Md. 1

Richard L. KRAMER v. LIBERTY PROPERTY TRUST f/k/a Republic Property Trust.

No. 23, Sept. Term, 2008.

Court of Appeals of Maryland.

March 23, 2009.

Stephen P. Sorenson (Paul Martin Wolff, Williams & Connolly LLP, Washington, DC), on brief, for Appellant.

Mark E. Nagle (Jennifer D. Chapman, Troutman Sanders LLP, Washington, DC), on brief, for Appellee.

Argued Before BELL, C.J., HARRELL, BATTAGLIA, GREENE, MURPHY, ADKINS and BARBERA, JJ.

GREENE, Judge.

Section 2-418 of the Corporations and Associations Article, Md.Code (1975, 2007 Repl.Vol.), authorizes a corporation to indemnify or advance expenses to a director who is a "party" to a "proceeding." Under the statute, a "`[p]arty' includes a person who was, is, or is threatened to be made a named defendant or respondent in a proceeding." Id. § 2-418(a)(6). "`Proceeding' means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative." Id. § 2-418(a)(7). In this advancement case, pursuant to the governing documents of Republic Property Trust ("Republic"), we must determine whether the expenses incurred by Richard L. Kramer, Republic's former Chairman and trustee, following an internal investigation, and in response to a recommendation that he either resign or face "further action," were incurred in connection with a "proceeding" under § 2-418. If so, then we must determine whether Kramer was made a "party" to the "proceeding" by reason of his status as a trustee of Republic.

Kramer, the appellant, contends that he incurred his expenses in a "proceeding" within the meaning of § 2-418. Specifically, he asserts, "[I]t is well-established that adversarial actions taken by companies against their officers or directors constitute `proceedings' that trigger the right to mandatory advancement." (Appellant's brief at 16-17.) Kramer further contends that he was made a "party" to the "proceeding" by reason of his status as a trustee of Republic, because "he was the express target of the efforts to investigate his conduct and oust him from his positions as Chairman and Trustee of Republic." (Appellant's brief at 25.) Liberty Property Trust ("Liberty"), the appellee and Republic's successor-in-interest, disagrees with Kramer, contending that there was no "proceeding" to which Kramer was made a "party" by reason of his status as a trustee.

We hold that a "proceeding" within the meaning of § 2-418 is an actual or threatened adjudicative or administrative process, or any stage of either process, including an investigation. The term "proceeding" does not, however, comprise a corporation's internal governance functions, such as the removal of a director or officer for cause. Although the internal investigation in this case was a "proceeding" under § 2-418, it was not one to which Kramer was made a "party" by reason of his status as a trustee of Republic. The investigation focused upon Kramer, not because of his status as a trustee of Republic, but because of his involvement with another entity, Republic Properties Corporation ("RPC"). Furthermore, Republic's actions following the internal investigation, during which it considered the recommendation that Kramer either resign or face "further action," did not constitute a "proceeding" within the meaning of § 2-418. Therefore, Kramer is not entitled an advancement, and we shall affirm the judgment of the Circuit Court for Baltimore City.

I.

A. Republic's Governing Documents

Republic was a Maryland real estate investment trust ("REIT") engaged in the acquisition, development, ownership, management, control, and disposition of real property. During the pendency of the instant litigation, Republic merged with Liberty and ceased to exist. Liberty assumed Republic's liabilities, including the liabilities to which Republic committed itself through its governing documents.

Republic's governing documents, its Declaration of Trust and Bylaws, contained, among other things, a commitment to indemnify its trustees for certain expenses incurred in their service as trustees. Included was the imperative that Republic advance to its trustees such expenses as incurred. Article IX, § 9.3 ("Indemnification") of the Declaration of Trust provided:

To the maximum extent permitted by Maryland law in effect from time to time, and in accordance with applicable provisions of the Bylaws, the Trust shall indemnify ... any present or former Trustee or officer who has been successful in the defense of a proceeding to which he or she was made a party by reason of service in such capacity, against reasonable expenses incurred by the Trustee or officer in connection with the proceeding and shall pay or reimburse, in advance of [the] final disposition of the proceeding, such reasonable expenses.

(Emphasis added.) Likewise, Article XI ("Indemnification and Advance of Expenses") of the Bylaws provided, in pertinent part:

To the maximum extent permitted by Maryland law in effect from time to time, the Trust shall indemnify ... any Trustee or officer ... who has been successful, on the merits or otherwise, in the defense of a proceeding to which he or she was made a party by reason of service in such capacity, against reasonable expenses incurred by him or her in connection with the proceeding.... In addition, the Trust shall pay or reimburse, as incurred, in advance of [the] final disposition of a proceeding, reasonable expenses incurred by a Trustee or officer or former Trustee or officer made a party to a proceeding by reason of such status, provided that the Trust shall have received: (i) a written affirmation by the Trustee or officer of his or her good faith belief that he or she has met the applicable standard of conduct necessary for indemnification by the Trust as authorized by these Bylaws and (ii) a written undertaking by or on his or her behalf to repay the amount paid or reimbursed by the Trust if it shall ultimately be determined that the applicable standard of conduct was not met....

* * * *

Any indemnification or payment or reimbursement of the expenses permitted by these Bylaws shall be furnished in accordance with the procedures provided for indemnification or payment or reimbursement of expenses, as the case may be, under Section 2-418 of the MGCL for directors of Maryland Corporations.[¹]

(Emphasis added.)

In addition to providing indemnification and advancement rights, Republic's Declaration of Trust set forth certain procedures with respect to matters of corporate governance. Under Article VIII, § 8.2 ("Voting Rights"), the shareholders of Republic were to elect its trustees. Pursuant to Article V, § 5.3 ("Resignation, Removal or Death"), a trustee of Republic could only be removed for cause, by a two-thirds vote of the shareholders.

B. Kramer's Request for an Advancement

Richard L. Kramer was the Chairman of the Board of Trustees and a trustee of Republic. Steven A. Grigg served as Republic's President and Chief Development Officer. In addition to their positions with Republic, Kramer and Grigg co-owned RPC, an affiliate of Republic engaged in real estate development in the City of West Palm Beach, Florida.

The events pertinent to this case began in October of 2004, when the West Palm Beach Community Redevelopment Agency ("CRA") voted to approve a Professional Services Agreement ("PSA") between the City and RPC for a project known as "City Center." Subsequently, in November of that year, RPC entered into a consulting agreement with West Palm Beach City Commissioner Raymond Liberti, who also served on the CRA. Although Kramer was active in engaging the assistance of Commissioner Liberti, it was Grigg who, on behalf of RPC, executed the consulting agreement and two of the three extensions thereto.

After Commissioner Liberti entered into the consulting arrangement with RPC, the CRA voted to amend the PSA on three occasions. The first amendment inured to the benefit of RPC. The second and third amendments inured to the benefit of Republic because, on December 19, 2005, the CRA voted to approve an assignment of the PSA from RPC to Republic.²

In May of 2006, federal prosecutors charged Commissioner Liberti with fraud and corruption in abuse of his elected position. Although these charges had nothing to do with Republic or RPC, the local press revealed that RPC paid consulting fees to Liberti while he was voting on matters affecting RPC. The press also reported that federal and State prosecutors knew about RPC's consulting arrangement with Commissioner Liberti and that State prosecutors planned to conduct a grand jury investigation into Liberti's dealings with RPC.

In response to the potential criminal investigation into RPC's dealings with Commissioner Liberti, Republic's Audit Committee engaged the law firm of Shulman, Rogers, Gandal, Pordy & Ecker, P.A. ("Audit Committee Counsel") to investigate the extent of Republic's involvement. According to Audit Committee Counsel, its "focus" of the investigation consisted of the following:

(i) assessing the nature of the dealings between Commissioner Liberti and Mr. Grigg in connection with the City Center project and other projects in Florida, (ii) the legality of the consulting agreements entered [into] between Commissioner Liberti and Mr. Grigg, (iii) who associated with [Republic] knew about the consulting agreements and when, (iv) whether [Republic] had a duty to disclose the consulting agreements to the City of West Palm Beach or to others, and (v) whether [Republic] contravened any laws in connection with the consulting agreements.

Audit Committee Counsel also examined "whether (i) Mr. Grigg's conduct in Florida ... provide[d] a basis for [Republic] to terminate Mr. Grigg for cause, and (ii) any other facts and circumstances learned in the course of the investigation suggest[ing] violations of law, contract, and corporate governance or ethical standards." As such, Republic recommended that...