Lerner v. Lerner Corp.

• Decision Date: 01 May 2000
• Docket Number: No. 938,938
• Citation: 750 A.2d 709,131 Md. App. 32
• Parties: Lawrence E. LERNER v. LERNER CORPORATION, et al.
• Court: Court of Special Appeals of Maryland

750 A.2d 709

131 Md. App. 32

Lawrence E. LERNER v. LERNER CORPORATION, et al.

No. 938, Sept. Term, 1999.

Court of Special Appeals of Maryland.

May 1, 2000.

Leonard N. Bebchick, Washington, DC (Douglas M. Bregman, Mark A. Gilday and Bregman, Berbert & Schwartz, Bethesda, on the brief), for Appellant.

Albert D. Brault (James M. Brault and Brault, Graham, Scott & Brault, LLC, Rockville, James H. Hulme, Stephanie A. Rigaux and Arent, Fox, Kitner, Plotkin & Kahn, PLLC, Washington, DC, on the brief), for Appellees.

Argued before MURPHY, C.J., and WENNER and EYLER, JJ EYLER, Judge.

The issues presented by this case arise out of a multi-year dispute between Lawrence E. Lerner, appellant (Lawrence), and Theodore N. Lerner, appellee (Theodore), no strangers to the litigation process. Lawrence and Theodore are brothers who, for many years, were jointly engaged in the business of buying, selling, developing, and managing real estate. Lerner Corporation, another appellee (Lerner Corporation or the Corporation), a subchapter S corporation incorporated under the laws of the State of Maryland, was the primary business entity through which the brothers operated.

Lerner Corporation, a closely held corporation but not a "close corporation" within the meaning of Maryland corporation law, was organized in 1965. It was authorized to issue ninety-five shares of no-par common stock. Theodore acquired seventy shares, and Lawrence acquired twenty-five shares. Theodore was president and one of three directors. Prior to September 1983, Lawrence was secretary and a director.

The brothers' relationship deteriorated, and in September 1983, Theodore caused Lawrence to be removed as an officer and director. Lawrence sued Theodore, Theodore undertook to "freeze-out" Lawrence as a stockholder, and Lawrence brought an action to enjoin the freeze-out. The Court of Appeals affirmed the trial court's entry of a preliminary injunction. See Lerner v. Lerner, 306 Md. 771, 511 A.2d 501 (1986). Prior to trial of that case, however, the brothers entered into a settlement agreement dated October 16, 1987 (Settlement Agreement or the Agreement). The Settlement Agreement provided that (1) Theodore would remain the chief operating officer of Lerner Corporation, (2) Lawrence would no longer be involved actively in Lerner Corporation but would continue to receive shareholder distributions, and (3) Theodore would have permission to use the resources of Lerner Corporation to benefit his other financial projects.

Disputes arose with respect to implementation of the Settlement Agreement. See, e.g., Lerner v. Lerner, 101 Md.App. 728, No. 1914, September Term 1993 (Maryland Court of Special Appeals filed September 30, 1994)(unreported), and Lerner v. Lerner Corp., 122 Md.App. 1, 711 A.2d 233 (1998). We see no need to repeat in this opinion the matters decided in the prior appeals. This case once again raises issues concerning the meaning and application of the Settlement Agreement, as well as questions of corporate law.

Facts

Appellant directs us to two paragraphs in the Settlement Agreement as relevant to the issues presented. Paragraph 5 provides: "LEL [Lawrence] shall continue as a shareholder of Lerner Corp. which itself shall continue with TNL [Theodore] as a shareholder." Paragraph 10, in pertinent part, grants Lawrence the right to receive a proportionate annual distributive share of income plus a preemptive right to purchase a proportionate share of any subsequent offering of Lerner Corporation's common stock.

Lerner Corporation sold stock in late 1995, but Lawrence elected not to purchase additional shares. All the shares were purchased by Theodore, increasing Theodore's interest to 89.9% and decreasing Lawrence's interest to 10.1%. In May 1998, Lerner Corporation again sold stock, at which time Lawrence purchased fourteen shares to maintain his proportionate interest.

Subsequent to that sale, Lerner Corporation gave Lawrence notice of a special shareholders meeting to be held on August 24, 1998. The purpose of the meeting was to consider a proposed amendment to the Corporation's charter. The effect of the amendment was to reclassify and convert each of the Corporation's common shares into 1/68th of a share, a "reverse stock split," which would have the effect of reducing Lawrence's interest to less than one share. The amendment provided that, in lieu of the issuance of fractional shares, Lawrence would be paid the fair value of his stock. This would eliminate Lawrence as a shareholder and convert his interest to cash. The notice was issued pursuant to authorization by the board of directors at a meeting held on August 11, 1998.

On August 21, 1998, Lawrence filed suit in the Circuit Court for Montgomery County, seeking a declaratory judgment, an injunction to prevent the reverse stock split, or, if not enjoined, rescission. The court issued a temporary restraining order to prevent adoption of the amendment, conditioned on posting a $100,000 bond. Lawrence failed to post adequate security, and the amendment was adopted on August 26, 1998. On January 4 through 6, 1999, the case proceeded to a non-jury trial on appellant's claim for rescission and declaratory relief. On June 11, 1999, the circuit court rendered a decision, ruling in favor of appellees.

At trial, Lawrence argued that the reverse stock split was not permissible because Lerner Corporation failed to demonstrate a legitimate business reason and because it violated the terms of the Settlement Agreement. Appellees responded that there was a legitimate business reason for the reverse stock split, there was no fraud or unfairness, and it was not precluded by the Settlement Agreement.

The circuit court ruled that the Settlement Agreement did not address the issue of duration. The court thus implied a reasonable time for its duration, finding that the approximate ten years, ten months time that had elapsed from the inception of the Settlement Agreement to the reverse stock split was a reasonable time. Second, the circuit court stated that the Settlement Agreement did not contemplate the "continued interference" by Lawrence that was found to exist. Third, the circuit court discussed the legal standard to be applied to judicial review of the reverse stock split and stated that, while the exact standard was unclear, it was either fraud, fairness, or business purpose. The court, after concluding there was no evidence to show fraud or unfairness, found there was a business purpose based on (1) the history of contentious litigation, (2) the likelihood that it would continue, (3) the need to maintain the subchapter S status of the Corporation that had been threatened by Lawrence's efforts, and (4) the need to maintain adequate cash reserves. Consequently, the court denied rescission and held that the charter amendment was not in violation of the Settlement Agreement and that appellees had not breached their legal duties.

Issues Presented

Appellant frames the issues as follows:

1. Did the Circuit Court err in terminating the 1987 Settlement Agreement among appellant Lawrence and appellees Theodore and the Corporation by creating and imposing a term of eleven years upon all of Lawrence's contractual rights arising thereunder, including, in particular, Lawrence's right to continue as a stockholder and to receive an annual distributive share of income?

2. Did the Circuit Court err in holding that Lawrence's actions lawfully justified and supported the entry of a judicial decree effectively terminating the 1987 Settlement Agreement?

3. Did the Circuit Court err in concluding that the Corporation lawfully had adopted and could implement a 1998 reverse stock split designed to wholly eliminate Lawrence's position as a minority stockholder?

Motion to Take Judicial Notice

Appellant filed in this Court a motion to take judicial notice, which we shall address prior to addressing the issues set forth above. First, appellant asks this Court to take judicial notice of (1) an order awarding supplemental judgment dated October 19, 1998, and (2) a notice of judgment, entered October 27, 1998, both by the Circuit Court for Montgomery County in Lerner, et al. v. Lerner Corporation, et al., No. 77954 Civil. The orders relate to proceedings on remand as the result of this Court's unreported opinion in Lerner v. Lerner Corporation, No. 1914, September Term 1994 (filed September 30, 1994). Appellant suggests that notice is required to provide this Court with a full chronology of the dispute among the parties. Second, appellant asks us to take judicial notice of Lerner Corporation's offer to sell stock dated May 18, 1998. This document was not admitted into evidence.

Maryland Rule 5-201 provides that a court may take judicial notice of adjudicative facts. The rule further provides that "[j]udicial notice may be taken at any stage of the proceedings." Md. Rule 5-201(f). As such, an appellate court may take judicial notice. See generally Joseph F. Murphy, Maryland Evidence Handbook § 1000, at 409 (3rd ed.1999) ("an appellate court may take judicial notice of a fact not judicially noted by the trial judge"); 5 Lynn McLain, Maryland Evidence § 201.1 n.6, at 90 (1987 & Supp.1995) (citing cases in which Maryland appellate courts have taken judicial notice).

The doctrine of judicial notice substitutes for formal proof of a fact "when formal proof is clearly unnecessary to enhance the accuracy of the fact-finding process." Smith v. Hearst Corp., 48 Md.App. 135, 136, 426 A.2d 1 (1981). A court may judicially note facts that readily can be determined by examination of a source whose accuracy cannot be reasonably questioned. Md. Rule 5-201(b). Included among the categories of things of which judicial notice may be taken are "facts relating to the ... records of the court." Smith, 48 Md.App. at 136 n. 1, 426 A.2d 1. In McCormick's treatise on evidence, it is said to be "settled, of course, that the courts, trial...