Plank v. Cherneski
| Decision Date | 14 July 2020 |
| Docket Number | Misc. No. 3 |
| Parties | WILLIAM H. PLANK, II, et al. v. JAMES P. CHERNESKI, et al. |
| Court | Court of Special Appeals of Maryland |
FIDUCIARY DUTIES - MANAGING MEMBERS OWED TO LIMITED LIABILITY COMPANY AND MEMBERS - AGENCY. Managing members of an LLC owe common law fiduciary duties to the LLC and to the other members based upon the fiduciary relations governing the principles of agency.
BREACH OF FIDUCIARY DUTY AS AN INDEPENDENT CAUSE OF ACTION. In Kann v. Kann, 344 Md. 689 (1997), and our jurisprudence that followed, this Court recognized a breach of fiduciary duty claim as an independent cause of action. To establish a breach of fiduciary duty, a plaintiff must show: (1) the existence of a fiduciary relationship; (2) breach of the duty owed by the fiduciary to the beneficiary; and (3) harm to the beneficiary. The remedy for the breach is dependent upon the type of fiduciary relationship, and the historical remedies provided by law for the specific type of fiduciary relationship and the specific breach in question, and may arise under a statute, common law, or contract. A breach of fiduciary duty cause of action should be analyzed on a case-by-case basis. If the plaintiff describes a fiduciary relationship, identifies a breach, and requests a remedy historically recognized by statute, contract, or common law applicable to the particular type of fiduciary relationship, the court should permit the count to proceed. The cause of action may be pleaded without limitation as to whether there is another viable cause of action to address the same conduct. To be clear, this does not mean that every breach will sound in tort, with an attendant right to a jury trial and monetary damages. The remedy will depend upon the specific law applicable to the specific fiduciary relationship at issue.
BREACH OF FIDUCIARY DUTY - SUFFICIENCY OF EVIDENCE. The circuit court did not err in entering judgment in favor of the managing member on the independent breach of fiduciary duty count. The court made a factual determination that there was insufficient evidence of a breach of fiduciary duty.
ATTORNEYS' FEES ARISING UNDER FEE-SHIFTING PROVISION IN OPERATING AGREEMENT. The circuit court correctly interpreted the fee-shifting provision of the parties' Operating Agreement and did not err in determining that the managing member and the Company were the "substantially prevailing parties" and in awarding the defendants their attorneys' fees in their entirety. Considering the overlapping nature of the claims, the circuit court's approach to awarding attorneys' fees in this case is consistent with the "common core of facts" doctrine, which was a reasonable method for awarding attorneys' fees in this case.
Circuit Court for Anne Arundel County
Barbera, C.J. McDonald Watts Hotten Getty Booth Battaglia, Lynne A. (Senior Judge, Specially Assigned), JJ.
Opinion by Booth, J.
Does Maryland recognize an independent cause of action for breach of fiduciary duty? Courts and commentators have been asking this question for 23 years since this Court articulated its holding in Kann v. Kann, 344 Md. 689 (1997).1 When attempting to answer the question, Maryland appellate courts have not spoken uniformly on this issue. Indeed, this Court has made seemingly inconsistent pronouncements, at times calling for a case-by-case analysis, see Kann, 344 Md. at 713, and at other times, making a blanket assertion that "Maryland does not recognize a separate tort action for breach of fiduciary duty." Int'l Bhd. of Teamsters v. Willis Corroon Corp. of Md., 369 Md. 724, 727 n.1 (2002). Litigants pick and choose which statement they believe to be controlling, depending on which outcome benefits their position. Understandably, the muddled state of our jurisprudence has created inconsistent and irreconcilable conclusions by the Court of Special Appeals, federal courts, and state circuit courts. For this reason, the Court of Special Appeals filed a Certification pursuant to Maryland Rule 8-304, requesting that this Court provide guidance concerning whether an independent cause of action exists, as well as its scope and parameters.
For the reasons more fully outlined below, we answer the certified questions as follows. This Court recognizes an independent cause of action for breach of fiduciary duty. To establish a breach of fiduciary duty, a plaintiff must demonstrate: (1) the existence of a fiduciary relationship; (2) breach of the duty owed by the fiduciary to the beneficiary; and (3) harm to the beneficiary. Under our Kann analysis, a court should consider the nature of the fiduciary relationship and possible remedies afforded for a breach, on a case-by-case basis. If a plaintiff describes a fiduciary relationship, identifies a breach, and requests a remedy recognized by statute, contract, or common law applicable to the specific type of fiduciary relationship and the specific breach alleged, a court should permit the count to proceed. The cause of action may be pleaded without limitation as to whether there is another viable cause of action to address the same conduct. To be clear, this does not mean that every breach will sound in tort, with an attendant right to a jury trial and monetary damages. The remedy will depend upon the specific law applicable to the specific fiduciary relationship at issue.
We explain our answer to the certified questions within the context of the dispute between the members of Trusox, LLC, a Maryland limited liability company ("Trusox" or the "Company"). William H. Plank, II and Sanford R. Fisher, both minority members of Trusox, filed an action alleging direct and derivative claims against James P. Cherneski, the Company's President, Chief Executive Officer ("CEO"), and majority member. Among other monetary and injunctive relief, Mr. Plank and Mr. Fisher ("Minority Members") sought an order dissolving the LLC or appointing a receiver to take over its management.
Following a bench trial, the Circuit Court for Anne Arundel County entered judgment: (1) in favor of Mr. Cherneski on most of the Minority Members' claims, including the claims for dissolution and receivership and, as most relevant to the issue raised in the Court of Special Appeals' Certification, their claim for breach of fiduciary duty, and (2) in favor of the Minority Members on certain other claims. Finding Mr. Cherneski and the Company to have prevailed on the most significant claims, the court entered an award of attorneys' fees in favor of Mr. Cherneski and the Company pursuant to a fee-shifting clause in the Trusox Operating Agreement.
The Minority Members assert that the circuit court committed multiple errors in resolving their breach of fiduciary duty claim. They also contend that the circuit court erred in its award of attorneys' fees by misinterpreting the contractual fee-shifting provision in the Trusox Operating Agreement. For the reasons explained below, we hold that the circuit court did not err in entering judgment in favor of Mr. Cherneski on the breach of fiduciary duty count. We further hold that the circuit court did not err in interpreting the contractual language of the fee-shifting provision by determining that the operative contractual language applied to all counts between the parties to this action, and by concluding that Mr. Cherneski and Trusox were the substantially prevailing parties. Finally, we hold that the circuit court did not abuse its discretion by awarding Mr. Cherneski and Trusox all of their attorneys' fees, as the court's methodology was consistent with the "common core of facts" doctrine. We affirm the circuit court's judgment in its entirety.
James Cherneski is a former professional soccer player who invented and patented a non-slip athletic sock. Based upon his personal experience, Mr. Cherneski was determined to create an athletic sock that would eliminate movement of a player's foot in his or her shoe during athletic activity. Over the course of many years, through trial and error, Mr. Cherneski developed a non-slip sock, and ultimately obtained patents for the athletic sock and its components.
As he was developing the product and securing patents, Mr. Cherneski accepted investments by Sanford Fisher and Jeff Ring. In April 2011, Mr. Cherneski formed Trusox, LLC to produce and sell the patented sock. Mr. Cherneski, Mr. Fisher, and Mr. Ring were the original members. At all times, Mr. Cherneski retained legal control of the Company.
By November 2011, the Company had a product that could be sold and marketed. Mr. Cherneski undertook marketing efforts, attempting to convince stores to sell the product. When the product did not sell, Mr. Cherneski determined that the product needed visibility, and he gave the product to professional soccer players in Europe in order to boost exposure and visibility. Mr. Cherneski traveled to England to work his connections in the professional soccer world, attempting to have the most high-profile players wear Trusox athletic socks. Mr. Cherneski's strategy worked. With an increase in product visibility, Trusox began receiving more orders for its product.
In June 2013, Mr. Cherneski began discussions with William H. Plank, II, about a possible investment. In October 2013, Mr. Plank invested $1.5 million in Trusox andacquired a 20% membership interest, with Mr. Cherneski owning a 65% membership interest, and Mr. Fisher and Mr. Ring each owning a 7.5% membership interest.
The members of Trusox, along with Trusox (by Mr. Cherneski as its CEO and President) entered into an Amended and Restated Operating Agreement ("Operating Agreement") on October 14, 2013. The Operating Agreement gives Mr. Cherneski, as the majority member, President, and CEO, general authority over most decisions relating to Trusox and its operations, including: (1) the right to make most decisions and take most actions2 on behalf of the company; (2)...
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