Renbaum v. Custom Holding, Inc.

• Decision Date: 04 April 2005
• Docket Number: No. 78,78
• Citation: 871 A.2d 554,386 Md. 28
• Parties: Barry J. RENBAUM v. CUSTOM HOLDING, INC., et al.
• Court: Maryland Court of Appeals

871 A.2d 554

386 Md. 28

Barry J. RENBAUM v. CUSTOM HOLDING, INC., et al.

No. 78, September Term, 2004.

Court of Appeals of Maryland.

April 4, 2005.

Barry J. Renbaum (Barry J. Renbaum, LLC, on brief), Glyndon, for petitioner.

Jeffrey L. Forman (Kauffman and Forman, P.A., on brief), K. Donald Proctor (Proctor & McKee, P.A., on brief), Towson, for respondents.

Argued before BELL, C.J., RAKER, WILNER, CATHELL, HARRELL, BATTAGLIA and GREENE, JJ.

HARRELL, J.

On 3 June 2002 Michael Renbaum (Michael) filed in the Circuit Court for Baltimore County a petition for the involuntary dissolution of Custom Holding, Incorporated ("Custom"), a closely held Maryland corporation, claiming that the directors of Custom were "so divided respecting management" of Custom that the "votes required for action by the board" could not be obtained. Michael, the majority shareholder of Custom (holding 53.86% of its capital stock)¹ and a director, alleged that the four directors of Custom were deadlocked as to whether dividends should be declared and whether the Treasurer of Custom, Barry Renbaum (Barry), Michael's brother, possessed the authority to act unilaterally on behalf of Custom. The court appointed counsel for Custom because the board of directors (Barry, Michael, and their respective wives) could not agree on counsel for these proceedings. Barry, owner of 20.9% of the total capital stock of Custom, later intervened on his own behalf as a minority shareholder.

After a March trial on the merits, the Circuit Court denied Michael's petition in a written order entered on 7 May 2003; however, the court subsequently granted Michael's motion to alter or amend judgment and admit additional evidence arising after the trial ended. Presumably moved by that additional evidence, the court ultimately ordered dissolution of Custom under § 3-413(a)(1) of the Corporations & Associations Article. Md.Code (1975, 1999 Repl.Vol.). Barry appealed on numerous grounds to the Court of Special Appeals, which affirmed the judgment in an unreported opinion filed on 17 September 2004.

Barry petitioned this Court for a writ of certiorari. We granted his petition and issued the writ, Renbaum v. Custom Holding, 383 Md. 256, 858 A.2d 1017 (2004), to consider the following three questions framed in his petition, which we reorder and restate for clarification.²

I. Did the trial court abuse its discretion in granting the post-judgment motion on the basis of operative facts distinct from and occurring subsequent to those adduced at trial?

II. May a court properly order dissolution of a corporation because its directors are divided on one or more issues without record evidence or a finding that the impasse impaired the successful conduct of the company's day-to-day business affairs?

III. Did the trial court commit prejudicial error in appointing independent counsel for Custom over the objection of an attorney / party / shareholder / director / officer who purported to represent the interests of the corporation?

We shall reverse in part and affirm in part the judgment of the Court of Special Appeals. Although the first two questions, at the time certiorari was granted, portended matters of substantial legal significance and novelty, for reasons we shall explain and upon closer consideration of the record and analysis, the results reached are rather a more prosaic set of conclusions.

I.

A.

The material facts were not disputed. Custom was incorporated on 7 January 1993 in Baltimore County under the General Corporation Law of the Corporations and Associations Article of the Maryland Code. Its stated purpose in the Articles of Incorporation is to "invest in securities of all kinds." Like other corporations in Maryland, the Articles included the ability to conduct any related or unrelated business activity to its purpose and all of the general powers granted a Maryland corporation under § 2-103 of the Maryland Corporations and Associations Article. Md.Code (1975, 1999 Repl.Vol.).³

Custom was the offspring of the sale of Custom Savings Bank ("Custom Savings") to Household International in 1993. Barry and Michael were the sole shareholders of Custom Savings at the time of sale. The approximately $40 million in proceeds from the sale of Custom Savings funded Custom's investment activities pursuant to its corporate charter.⁴

Custom originally had five directors; however, its Articles were amended to reduce that number to four, a decision that enabled the present litigation. A unanimous joint director and shareholder agreement on 15 June 1993 ordered the surrender and retirement of all of the existing shares of capital stock and reissued new shares to the current shareholders in two classes Class B for Barry Renbaum and Class M for Michael Renbaum. Custom's President, Michael, and its Secretary, Barry, subsequently filed Articles of Amendment adopted by the directors and shareholders, permitting each class of stock the right to elect two of the four directors.⁵ As a result of these changes, Custom had (and currently has) two "Class B Directors" (Barry and his wife, Carol) and two "Class M Directors" (Michael and his wife) elected by their respective class of shareholders.

Following these changes, there were 29,663 Class M shares controlled by Michael and his family and 22,837 Class B shares controlled by Barry and his family.⁶ Each share of Class M or Class B stock had identical rights to dividends and an equal distribution per share of the corporation's assets upon liquidation. As a result, any dividend or distribution of assets to the combined shareholders was distributed equally among all of the shareholders, regardless of class.

Custom's by-laws also stated that the Board of Directors "may appoint" a general counsel. The by-laws further stated that "[i]t shall be the duty of the Officers and Directors to consult from time to time with the general counsel (if one has been appointed), as legal matters arise." The general counsel could be removed and replaced only by the Board of Directors.

In 1995, the Board of Directors approved an annual dividend of $4 million, payable on 4 January 1995. Subsequent annual dividends ranging from $2.5 million to $4 million were paid in January of each year from 1996 until 2001 upon informal director approval, generally by way of an oral agreement. While these payments were made in January, they were dividend distributions pertaining to the preceding calendar year.

In late 2001, Barry and Michael disagreed over the annual dividend for 2001, to be paid in January 2002. Barry refused to support any dividend amount; Michael desired at least a $3 million dividend. Custom's board of directors did not declare a dividend for 2001.

Contrary to the dispute over the distribution of dividends (which was debated, at least in part, in terms of the substantial decrease at the time in the market value of Custom's marketable securities portfolio), both Barry and Michael (and their wives) were able to agree on the selection of a professional manager, the Vanguard Group, for Custom's investment holdings. Neither Barry nor Michael disagreed as to the management of Custom's investments and, even during the conflicts that gave rise to this litigation, teleconferenced regularly with Vanguard personnel concerning the asset allocation and investment strategy for Custom's holdings.

Concurrent with the dispute over dividends, Barry also disagreed with Custom's corporate counsel, Shale Stiller (who was also Michael's personal attorney), over a legal bill sent to the corporation. Although Custom's by-laws reposed the power to appoint or remove Custom's counsel solely in the board of directors, Barry, on his own behalf, sent a letter dated 29 May 2002 requesting that Mr. Stiller step down as corporate counsel and refusing to pay any further billings from Mr. Stiller's law firm.

B.

Unwilling to face the prospect of his personal and familial financial commitments in 2002 without a dividend payout and seemingly at odds with his brother, Michael filed in the Circuit Court his petition for involuntary dissolution, pursuant to § 3-413(a)(1), on 3 June 2002.⁷ His petition stated that the board of directors "have been deadlocked" on the question of dividends. In addition, "the directors are deadlocked on the question of the authority of Barry J. Renbaum, as Treasurer of the Corporation, to take certain actions on behalf of the Corporation," to wit, the situation regarding corporate counsel. The petition also alleged that the board would be unable to agree to counsel for Custom in the litigation because Custom's general counsel (Stiller) was also Michael's private attorney. Michael also filed contemporaneously a motion to appoint counsel for Custom in the litigation.

The motion to appoint counsel was granted on 3 June 2002 and Jeffrey Forman, Esq., was appointed as counsel for Custom for purposes of the litigation. On 18 June 2002, Barry moved to vacate Forman's appointment and to intervene.⁸ In his motion, Barry asserted that Custom had a constitutional right to choose its own counsel (which, in his opinion, was himself) and that there was no statutory authority for an ex parte appointment of counsel for the corporation in an involuntary dissolution proceeding. Although the court struck its 3 June order and ordered a hearing to determine appropriate counsel for Custom, it determined as the result of the hearing that the directors, and particularly Michael and Barry, could not agree on appropriate counsel and re-appointed Forman as counsel for Custom. Barry's intervention was allowed.

On 21 November 2002, a special meeting of the board of directors was called by Barry in an attempt to resolve the dividend deadlock. Both Michael and Barry presented proposals to the Board. Michael presented eleven resolutions, of which two (that were not approved) are material to this appeal. First, the Board failed to approve a resolution (by a 2-2 vote) to confirm ...