Eastland Food v. Mekhaya

Eastland Food Corporation, et al. v. Edward Mekhaya, No. 37, September Term, 2022.

Opinion by Gould, J.

SUFFICIENCY OF PLEADINGS – STOCKHOLDER OPPRESSION –

“REASONABLE EXPECTATION”

The Supreme Court of Maryland held that a proposed amended complaint stated a cause of

action for stockholder oppression because the plaintiff alleged sufficient facts to support

the reasonableness of his expectation that, by virtue of his status as a stockholder, he would

have had continued employment and managerial involvement in his company and would

have continued to receive his proportional share of the distributable profits.

BREACH OF FIDUCIARY DUTY – STANDING TO BRING ACTION

The Supreme Court of Maryland held that a proposed amended complaint did not state a

cause of action for breach of fiduciary duty. The Court determined that the plaintiff could

not bring a direct claim for compensatory damages as opposed to a derivative claim

because his alleged injury due to breach of fiduciary duty was not separate and distinct

from any injury suffered by the corporation.

UNJUST ENRICHMENT – STANDING TO BRING ACTION

The Supreme Court of Maryland held that a proposed amended complaint did not state a

cause of action for unjust enrichment. The Court determined that the plaintiff could not

bring a direct claim for compensatory damages as opposed to a derivative claim because

the alleged excessive compensation and use of company funds for personal purposes came

at the corporation’s expense, not at his expense.

Circuit Court for Howard County

Case No. C-13-CV-21-000666

Argued: June 2, 2023

IN THE SUPREME COURT OF

MARYLAND*

No. 37

September Term, 2022

______________________________________

EASTLAND FOOD CORPORATION, et al.

v.

EDWARD MEKHAYA

______________________________________

Fader, C.J.,

Watts,

Hotten,

Booth,

Biran,

Gould,

Eaves,

JJ.

______________________________________

Opinion by Gould, J.

Pursuant to the Maryland Uniform Electronic Legal Materials Fader, C.J., and Booth, J., concur.

Act (§§ 10-1601 et seq. of the State Government Article) this

document is authentic.

______________________________________

2023-09-05 16:21-04:00

Filed: August 31, 2023

Gregory Hilton, Clerk

* At the November 8, 2022 general election, the voters of Maryland ratified a constitutional

amendment changing the name of the Court of Appeals of Maryland to the Supreme Court

of Maryland. The name change took effect on December 14, 2022.

This case requires us to test the legal sufficiency of the three-count complaint filed

by a minority stockholder in a family-owned corporation against the majority stockholders

and directors. The minority stockholder alleged one count of stockholder oppression

seeking equitable relief short of dissolution and two counts seeking compensatory damages

for claims of breach of fiduciary duty and unjust enrichment. The Circuit Court for Howard

County granted defendants’ motion to dismiss for failure to state a claim upon which relief

may be granted. In doing so, the court denied plaintiff’s request for leave to amend the

complaint, a copy of which was appended to plaintiff’s motion to alter or amend the

judgment, which the court also denied.

The Appellate Court of Maryland1 reversed the judgment of the circuit court, finding

that plaintiff’s complaint alleged sufficient facts to state a cause of action for each of the

three counts. Mekhaya v. Eastland Food Corp., 256 Md. App. 497 (2022). For the reasons

explained below, we affirm the judgment of the Appellate Court as to Count I (stockholder

oppression) and reverse as to both Count II (breach of fiduciary duty) and Count III (unjust

enrichment).

1

At the November 8, 2022 general election, the voters of Maryland ratified a

constitutional amendment changing the name of the Court of Special Appeals of Maryland

to the Appellate Court of Maryland. The name change took effect on December 14, 2022.

BACKGROUND

The Allegations of the Proposed Amended Complaint2

This case involves a Maryland corporation called Eastland Food Corporation

(“Eastland”). Eastland imports and distributes food and other products. Eastland was

founded in the 1980s by Pricha Mekhayarajjananonth, the father of respondent Edward

Mekhaya.3

Edward had always wanted to be an engineer and, in furtherance of this goal,

obtained a Bachelor of Science degree in Electrical and Computer Engineering and a

Master of Science degree in Electrical Engineering. He then began a successful

engineering career with Hughes Networking Systems in 1997.

In 1999, Pricha recruited Edward to work for Eastland. Pricha told Edward he

would become an employee of Eastland, eventually become an owner, and, once an owner,

be compensated as an owner. Pricha explained that Eastland distributed profits as annual

bonuses instead of dividends. Based on Edward’s conversations with his father,

recognition of the importance of family, expectations of continued employment and

participation in Eastland’s management, and Eastland’s compensation structure, Edward

2

Because this case comes to us in the context of the granting of a motion to dismiss

for failure to state a claim, the summary that follows is drawn from plaintiff’s allegations,

which obviously are slanted from plaintiff’s perspective. Our recitation of the facts in this

fashion should not be construed as reflecting any assessment of the merits of the

allegations. Moreover, for the reasons explained below in the Standard of Review, we are

analyzing this matter based on the allegations in plaintiff’s proposed amended complaint.

3

For clarity purposes only, because all but one of the parties are immediate family

members, we will use first names throughout this opinion. In doing so, we intend no

disrespect.

2

resigned from Hughes Networking Systems in 2000 to join Eastland. Edward’s parents,

Pricha and Vipa Mekhaya, knew that he was forgoing his successful engineering career to

join Eastland.

In 2002, Edward was promoted to Vice-President of Operations and was elected to

Eastland’s board of directors. From 1996 through the end of 2008, Pricha and Vipa each

owned 50 percent of the issued and outstanding stock in Eastland. In 2008, as part of

Edward’s parents’ estate planning, Eastland amended its articles of incorporation to

increase the number of authorized shares. Eastland then issued sufficient shares to Pricha,

Vipa, Edward’s brother Oscar Mekhaya, and Edward to establish the following allocation

of the issued and outstanding stock: Pricha – 35 percent; Vipa – 35 percent; Oscar – 15

percent; and Edward – 15 percent.

Eventually, in November 2015, Pricha ceased being a shareholder of Eastland and

agreed to distribute his shares. This distribution yielded the current allocation of Eastland’s

stock, with Vipa owning 35 percent, Edward owning 28 percent, Oscar owning 28 percent,

and trusts for the benefit of Oscar’s three children owning a collective 9 percent.

Edward made many contributions to the company over the years. He led efforts to

establish and improve business procedures, and selected and implemented technology to

support these improvements. He also introduced warehouse management software and

tablet-based order taking, led the design and construction of all but one of Eastland’s

warehouses, managed Eastland’s move to its current Maryland offices, led research into

better financial and purchasing methods, and researched and worked on Eastland’s first

employee handbook.

3

From 2000 to 2008, Edward’s annual compensation increased dramatically, from

$53,564 in 2000 to $457,376 in 2008. Between 2008 and 2018, Edward’s annual

compensation ranged from $400,000 to $600,000. This compensation included the bonus

payments—which fluctuated year to year based on Eastland’s profitability—that Edward

received between 2010 and 2018 in lieu of dividends.4 Edward expected to continue

sharing in Eastland’s profits, maintain his employment, and participate in management for

the duration of Eastland’s existence.

In August 2017, Pricha, who until then had led and managed Eastland as its

President and as a member of the board of directors, was removed from both positions

because, among other reasons, he had moved to Thailand and was not expected to return

to resume his duties. Prior to his departure, Pricha had always unilaterally determined the

amount of the profit bonuses paid to Eastland’s owners.

The following month, over Edward’s objection, Oscar was elected President of

Eastland.5 In August 2018, as a director of Eastland, Edward signed a consent form

approving a credit line increase for Eastland. Edward did so under protest over various

concerns he had raised with the apparent accumulation of excess inventory at a time when

revenues increased only “modestly.”

4

Edward included this information in tables that listed the annual compensation he

received every year from 2000 to 2018, including the amounts attributable to Pricha’s

unilaterally-determined profit bonuses from 2010 to 2018.

5

The amended complaint uses the passive voice “was elected” but does not say who

did the electing. We assume that Oscar was elected by the board of directors, consistent

with its statutory duties. See Md. Code Ann. Corps. & Ass’ns § 2-413 (1975, 2014 Repl.

Vol.).

4

On October 2, 2018, Edward received from Eastland’s counsel the agenda for the

stockholders’ meeting scheduled for October 12. The agenda included “introduction of a

dividend study (advantages to moving to shareholders getting dividends with respect to

their ownership in lieu of salaries being paid as if they were dividends).” On October 10,

Edward requested three years of payroll data from Eastland’s human resources manager.

At Oscar’s instruction, the manager withheld the requested information from Edward.

Edward came to the October 12 stockholders’ meeting accompanied by his personal

counsel. Motions to exclude his counsel from the meeting were made and then withdrawn.

Various matters were discussed, and the board of directors was elected. This time, “without

cause or reason,” Edward was not re-elected. Since that meeting, the board of directors

has consisted of three members: Oscar, Vipa, and an individual named Tisnai Thaitam.

Edward’s efforts to re-join the board were rejected by the stockholders at subsequent

annual stockholder meetings.

Three days after the October 12 stockholders’ meeting, Edward was terminated

from his position with Eastland. After he was terminated, despite the company’s continued

profitability, Eastland has refused to pay Edward any share of the profits whatsoever,

regardless of its form. Instead, Vipa, who has done no substantial work for Eastland, and

Oscar, whose poor management skills have caused high employee turnover and low

morale, have been taking excessive compensation and diverting corporate funds for

personal use.

5

The Counts

Edward’s proposed amended complaint alleges the same three causes of action

asserted in his initial complaint: oppression of a minority shareholder against Oscar, Vipa,

Tisnai, and Eastland (Count I); breach of fiduciary duty against Oscar, Vipa, and Tisnai

(Count II); and unjust enrichment against Oscar and Vipa (Count III). Each count rests on

common facts, namely, that since Edward was terminated from Eastland: (1) Oscar and

Vipa have received distributions of Eastland’s profits through excessive compensation;

(2) Oscar and Vipa have diverted corporate funds for personal use; and (3) Eastland refuses

to pay any share of the profits to Edward through compensation or dividends.

In Count I, Edward alleges that Vipa and Oscar, as both majority stockholders and

directors, along with Tisnai as director, engaged in conduct that has defeated his reasonable

expectations of continued employment, managerial input, and sharing of profits as a

stockholder. In doing so, Edward invokes the involuntary dissolution statute, Md. Code

Ann. Corps. & Ass’ns (“CA”) § 3-413 (1975, 2014 Repl. Vol.), but seeks various forms of

equitable relief short of dissolution, namely: (i) “the appointment of a receiver . . . to

continue the operation of Eastland for the benefit of all stockholders”; (ii) “the retention of

jurisdiction of the case by the court for the protection of the minority stockholders without

appointment of a receiver”; (iii) an injunction prohibiting continuing acts of “oppressive”

conduct as alleged in the amended complaint; (iv) “an injunction directing [petitioners] to

declare and pay dividends for the calendar years 2018, 2019, and 2020”; (v) an injunction

directing petitioners to pay Eastland’s profits to Edward as a bonus in lieu of a declared

dividend; (vi) “a constructive trust against the profits of [] Eastland for distribution to

6

[Edward] in the same form as the profits of [] Eastland are distributed to other

stockholders . . . .”; (vii) “an accounting to [Edward] of all income, expenses, profits,

liabilities, assets, and transactions of [] Eastland”; and (viii) other equitable relief as

appropriate under CA § 3-413. He also seeks compensatory damages of at least $75,000.

In Count II, Edward alleges that Oscar, Vipa, and Tisnai, in their capacities as

Eastland’s directors, breached their fiduciary duties to Eastland and its stockholders,

including the duties

to act (1) in good faith; (2) in a manner each reasonably believes to be in the

best interests of Eastland; and (3) with the care that an ordinarily prudent

person in a like position would use under similar circumstances, so as to

benefit all stockholders equally and not in furtherance of their personal

interest or benefit.[6]

In addition, Edward alleges that, as majority shareholders of Eastland, Oscar and

Vipa breached their fiduciary duty not to exercise their control of the company to his

disadvantage. Edward seeks compensatory damages of at least $75,000 for this count.

In Count III, Edward alleged that Oscar and Vipa were unjustly enriched at his

expense by their excessive compensation and diversion of corporate funds for personal use.

He seeks compensatory damages of at least $75,000.

Defendants’ Motion to Dismiss

Petitioners Eastland, Oscar, Vipa, and Tisnai jointly moved to dismiss Edward’s

complaint pursuant to Maryland Rule 2-322. Petitioners’ motion and Edward’s opposition

debated whether Edward alleged sufficient facts to: (1) sustain a stockholder oppression

6

Edward does not cite CA § 2-405.1 as the source of such duties, but recites almost

verbatim the language from that statute.

7

claim, given the at-will nature of his employment with Eastland; (2) overcome the business

judgment rule under CA § 2-405.1; and (3) sustain a direct cause of action against Oscar,

Vipa, and Tisnai.

The court heard oral argument on defendants’ motion, at the end of which Edward’s

counsel sought leave to amend the complaint to cure any defects in it. The court asked

counsel to proffer the additional facts that Edward would allege. Edward’s counsel

explained, among other things, that Edward would allege additional facts relating to the

circumstances under which Edward joined Eastland and Eastland’s practice of distributing

profits through bonus compensation.

The circuit court denied Edward’s counsel’s request and granted the motion to

dismiss in its entirety, with prejudice. Regarding Edward’s claim of oppression of a

minority shareholder, the trial judge explained:

I think [Edward’s] pleadings . . . fail to show or plead how [his] expectations

were substantially defeated. The concept of his salary as dividends — or

dividends as salary, excuse me, is a new concept today. There is no — there

seems to be no confirmed basis that it was ever reviewed as [] dividends or

that the salary was viewed as dividends in this matter. And I think that when

you look at [the case law], it is necessary to look at . . . the overall

relationship, [and] there’s no expectations set up that there would be

dividends and that these would be continued to be paid. There was an

employee of the company who had been terminated and so on. And so, I

think in the general nature of the pleadings, they’re not sufficient at this time.

With respect to Edward’s claims of breach of fiduciary duties and unjust

enrichment, the court stated:

In terms of Counts Two and Three, this was not brought as a derivative

suit . . . . I think the – again, [Edward’s] assertion that dividends would have

been paid is a misnomer here. That he was receiving a salary before. He

was fired as an at-will employee and so was no longer receiving a salary.

8

And in the pleading, itself, it indicates that – really makes assertions that part

of that harm was to the corporation, and I’ve heard nothing today that the

harm was distinct from that of the corporation . . . . And again, there is a

presumption, based on [the business judgment rule], that the Defendants in

their capacities acted . . . in the best interest of the company and that they

acted accordingly. And based on what is in the pleadings, they are not

sufficient. And I have heard nothing today, even with what [Edward]

through Counsel had added that would or could be had with amendment.

Edward timely moved to alter or amend the judgment. He attached his proposed

amended complaint as an exhibit. In a brief order, the circuit court denied Edward’s motion

“[a]fter careful consideration of the motion, opposition, and reply[.]”

Edward timely appealed to the Appellate Court of Maryland.

Opinion of the Appellate Court of Maryland

The Appellate Court of Maryland reversed the judgment of the circuit court and held

that Edward alleged sufficient facts to support all three causes of action in his initial

complaint. Mekhaya v. Eastland Food Corp., 256 Md. App. 497, 526-27, 530 (2022). The

Court found that he stated a claim for stockholder oppression because he “allege[d] that

Eastland’s majority shareholders, namely Oscar and Vipa, engaged in conduct that defeated

substantially his objectively reasonable expectations as a minority shareholder,” and “the

relief requested . . . c[a]me within the circuit court’s equitable powers.” Id. at 518. The

Court focused its attention on Edward’s claim that he reasonably expected to continue

sharing in company profits by way of “de facto dividends” paid to employees through

compensation and bonuses, and that cessation of these payments due to his termination

substantially defeated this expectation. Id.

9

The Court construed Maryland statutes on corporate dividends to neither expressly

recognize nor foreclose the possibility of “de facto” dividends. Id. at 519. According to

the Court, the concept of a “constructive,” “disguised,” or “de facto” dividend paid as part

of a shareholder’s salary is well-established in other jurisdictions. Id. Thus, the Court held

that Edward’s complaint “alleged facts sufficient to establish that his expectations as a

shareholder were reasonable . . . and that Appellees defeated substantially one or more of

those expectations.” Id. at 519-26.

The Court also held that the circuit court erred in dismissing Edward’s breach of

fiduciary duty count, crediting Edward’s allegations that the board owed him a fiduciary

duty to continue paying him “de facto” dividends and that deprivation of those dividends

constituted a breach resulting in harm to Edward. Id. at 529-30. The Court explained that

because Edward alleged that he, rather than the corporation, suffered the harm alleged, he

properly asserted a direct rather than a derivative claim. Id. However, the Court cautioned

that Edward’s breach of fiduciary duty claim would need to be brought derivatively if he

could not prove his entitlement to the “de facto” dividends received by Oscar and Vipa.

Id. at 530.

Finally, the Appellate Court held that the circuit court erred in dismissing Edward’s

unjust enrichment count. Id. The Court concluded that Edward alleged individual harm

from being deprived of a “de facto” dividend paid to and inequitably retained by Oscar and

Vipa, and that he therefore alleged a cognizable direct claim. Id.

10

Petitioners petitioned for writ of certiorari, which we granted. Eastland Food Corp.

v. Mekhaya, 483 Md. 264 (2023). They present one question for our review, which we

have rephrased as follows:7

May a minority shareholder of a closely held Maryland corporation bring direct

claims against the corporation’s board of directors for minority shareholder

oppression, breach of fiduciary duty, and unjust enrichment on the ground that the

directors distributed corporate profits to the exclusion of the minority shareholder?

STANDARD OF REVIEW

Pursuant to Maryland Rule 2-322(b)(2), a defendant may move to dismiss a

complaint for failure to state a claim upon which relief can be granted. The court must

read the complaint in the light most favorable to the plaintiff, and accept as true the well-

pleaded facts and the reasonable inferences drawn from such facts. RRC Ne., LLC v. BAA

Md., Inc., 413 Md. 638, 643 (2010). The court may dismiss the complaint only if the

allegations and permissible inferences drawn therefrom fail to state a cause of action. Id.

The court’s ruling is a question of law that appellate courts review without deference.

Chavis v. Blibaum & Assocs., P.A., 476 Md. 534, 551 (2021).

If the court orders dismissal pursuant to Maryland Rule 2-322(b)(2), “an amended

complaint may be filed only if the court expressly grants leave to amend.” Md. Rule 2-

7

The question as presented by petitioners was:

May a minority shareholder bring a direct action against a closely-held

Maryland corporation whose Board of Directors had never declared a

dividend on the grounds that a portion of the employment compensation

previously paid to him was a “de facto dividend” he expected to continue,

even though this Court has never recognized the doctrine of “de facto

dividend” and Maryland law provides dividends cannot accrue or be payable

unless they are declared by the corporation’s Board of Directors?

11

322(c). Maryland Rule 2-341 governs amendment of pleadings. When leave of court is

required, Rule 2-341(c) provides that “[a]mendments shall be freely allowed when justice

so permits.” Denial of leave to amend is appropriate if the amendment would result in

prejudice to the other party, undue delay, or where amendment would be futile because the

claim is irreparably flawed. RRC Ne., 413 Md. at 673-74. This flexibility ensures that

cases succeed or fail on their merits, not on the niceties of pleading. Crowe v. Houseworth,

272 Md. 481, 485 (1974).

Here, the circuit court dismissed the initial complaint with prejudice and denied

Edward’s request for leave to amend, which he made at the hearing on the motion to

dismiss and again in his motion to alter or amend the judgment. We assume that the circuit

court, after careful consideration, concluded that the proposed amended complaint did not

cure the complaint’s deficiencies and therefore determined that it would have been futile

for plaintiff to file it.

The Appellate Court reversed the circuit court based on its analysis of the complaint

alone, without considering the proposed amended complaint. We take a different approach

and analyze the legal sufficiency of Edward’s proposed amended complaint, summarized

above. That’s because, if the proposed amended complaint would have stated a cause of

action, Edward should have been granted leave to file it. As explained below, we conclude

that the proposed amended complaint alleged sufficient facts to support one of the three

causes of action Edward asserted.

12

DISCUSSION

Basic Principles of Corporate Law

“A commercial corporation is a legal entity conceived by the mind of man and

legitimated by statute for the avowed purpose of achieving a maximum profit with a

minimum exposure to liability.” Dixon v. Process Corp., 38 Md. App. 644, 645 (1978).

Corporations are legal entities separate and apart from their owners. United Elec. Supply

Co. v. Greencastle Gardens Section III Ltd. P’ship, 36 Md. App. 70, 79 (1977). The

statutory provisions governing Maryland corporations are contained in the Corporations

and Associations Article. Titles 1 through 3 of that article are collectively known as the

Maryland General Corporation Law (the “MGCL”). The MGCL covers, among other

things, the formation of corporations, rights and duties of stockholders, officers, and

directors, and extraordinary actions such as dissolving and winding up the affairs of

corporations. The internal affairs of a corporation are governed by the relevant provisions

of the Corporations Article, along with the corporation’s articles of incorporation, bylaws,

and any stockholder agreements.8

8

These instruments may alter the default rules governing the internal affairs of

corporations set forth in the MGCL. See, e.g., CA §§ 2-405.2 (“The charter of the

corporation may include any provision expanding or limiting the liability of its directors

and officers . . . .”); 2-406 (“Unless the charter of the corporation provides

otherwise . . . .”); 2-407 (“[U]nless the charter or the bylaws of the corporation provide

otherwise . . . .”); 2-408 (“Unless the bylaws of the corporation provide otherwise . . . .”),

2-409 (“Unless the bylaws of the corporation provide otherwise . . . .”); 2-413 (“Unless the

bylaws provide otherwise, the board of directors shall elect the officers.”); 2-503 (“Unless

the charter provides otherwise, meetings of stockholders shall be held as . . . .”); 2-504

(“Unless the charter or bylaws provide otherwise . . . .”).

13

A corporation is owned, but not managed, by its stockholders. Mona v. Mona Elec.

Grp., Inc., 176 Md. App. 672, 695 (2007). The responsibility for managerial oversight of

a corporation lies with its board of directors pursuant to CA § 2-401, which provides:

(a) All business and affairs of a corporation, whether or not in the ordinary

course, shall be managed by or under the direction of a board of directors.

(b) All powers of the corporation may be exercised by or under authority of

the board of directors except as conferred on or reserved to the

stockholders by law or by the charter or bylaws of the corporation.

The board of directors exercises its authority either directly or through the officers

it appoints. CA § 2-401; Werbowsky v. Collomb, 362 Md. 581, 598-99 (2001). Directors

are elected by the stockholders. CA § 2-404. Among other duties, directors are responsible

for establishing the compensation structure for executives. Mona, 176 Md. App. at 695.

The standards for director conduct are set forth in CA § 2-405.1. Enacted by the

General Assembly in 1976, this statute was designed to replace the prior and sometimes

inconsistent or confusing articulations of such standards in Maryland caselaw.9 Under the

current version of CA § 2-405.1(c):

Given the context in which this case comes to us—a dismissal of the complaint for

failure to state a claim—none of these instruments are before the Court. The discussion

that follows is limited, therefore, to the relevant provisions of the MGCL.

9

See, e.g., Booth v. Robinson, 55 Md. 419, 436-37 (1881) (explaining that the

confidence reposed in directors “require[s] a strict and faithful discharge of duty”); Fisher

v. Parr, 92 Md. 245, 265 (1901) (establishing that directors are “required to perform their

duties with skill and reasonable care”); Carrington v. Basshor, 118 Md. 419, 442-43 (1912)

(requiring proof of “gross or culpable negligence” to render a director personally liable);

Matthews v. Headley Chocolate Co., 130 Md. 523, 528 (1917) (explaining that a

corporation can proceed in equity for the “illegal, fraudulent, ultra vires, or grossly

negligent acts of its directors or officers”); Pritchard v. Myers, 174 Md. 66, 77 (1938)

(noting that a director may be personally liable if he or she “neglect[s] to exercise that

14

[a] director of a corporation shall act: (1) [i]n good faith; (2) [i]n a manner

the director reasonably believes to be in the best interests of the corporation;

and (3) [w]ith the care that an ordinarily prudent person in a like position

would use under similar circumstances.

In Shenker v. Laureate Education, Inc., this Court held that CA § 2-405.1 was the

exclusive source of the directors’ standard of care only when acting in their managerial

capacity. 411 Md. 317, 339 (2009). According to Shenker, when directors step out of their

managerial role to negotiate the price stockholders will receive for their shares in a cash-

out merger, they act as fiduciaries to the stockholders and thereby assume the fiduciary

duties of maximizing the price and disclosing all material information concerning the

transaction. Id. at 336-39.10

The General Assembly took note of Shenker and amended CA § 2-405.1 in 2016

to clarify that the statute applies to all of the directors’ conduct.11

degree of diligence and prudence in the management of the corporation . . . which

ordinarily skillful and prudent men generally exercise in that situation”); Williams v.

Salisbury Ice Co., 176 Md. 13, 23 (1939) (requiring the plaintiff to produce proof of

fraudulent conduct on behalf of the director to maintain an action against the corporation);

Warren v. Fitzgerald, 189 Md. 476, 491 (1948) (returning to the fraud standard articulated

in Matthews v. Headley Chocolate Co.); Parish v. Md. & Va. Milk Producers Ass’n, 250

Md. 24, 74 (1968) (explaining that corporate directors may be personally liable for loss of

corporate funds due to “gross or culpable negligence”).

10

Noting that CA § 2-405.1(g) stated that “[n]othing in this section creates a duty

of any director of a corporation enforceable otherwise than by the corporation or in the

right of the corporation,” the Court held that this bar against direct actions applied only to

managerial activities subject to section 2-405.1’s standard of care, but not to claims based

on duties imposed by directors acting in a non-managerial role. Shenker, 411 Md. at 348-

49.

11

Section 2-405.1 provides that:

15

(a) In this section, “act” includes, as the context requires:

(1) An act, omission, failure to act, or determination made not to act;

or

(2) To act, omit to act, fail to act, or make a determination not to act.

(b) This section applies to acts of an individual who:

(1) Is or was a director of a corporation; and

(2) Is acting or was acting in the individual’s official capacity as a

director of a corporation.

(c) A director of a corporation shall act:

(1) In good faith;

(2) In a manner the director reasonably believes to be in the best

interests of the corporation; and

(3) With the care that an ordinarily prudent person in a like position

would use under similar circumstances.

(d)(1) A director is entitled to rely on any information, opinion, report, or statement,

including any financial statement or other financial data, prepared or presented by:

(i) An officer or employee of the corporation whom the director reasonably

believes to be reliable and competent in the matters presented;

(ii) A lawyer, certified public accountant, or other person, as to a matter

which the director reasonably believes to be within the person's professional

or expert competence; or

(iii) A committee of the board on which the director does not serve, as to a

matter within its designated authority, if the director reasonably believes the

committee to merit confidence.

(2) A director is not acting in good faith if the director has any knowledge

concerning the matter in question which would cause the reliance to be

unwarranted.

(e) A director who acts in accordance with the standard of conduct provided

in this section shall have the immunity from liability described under § 5-417

of the Courts and Judicial Proceedings Article.

***

(g) An act of a director of a corporation is presumed to be in accordance with

subsection (c) of this section.

(h) An act of a director of a corporation relating to or affecting an acquisition

or a potential acquisition of control of the corporation or any other

transaction or potential transaction may not be subject to a higher duty or

greater scrutiny than is applied to any other act of a director.

16

Three observations about CA § 2-405.1 in its current form are relevant here. First,

section 2-405.1 applies only to a current or former director acting in their “official capacity

as a director of the corporation.” CA § 2-405.1(b). This section does not, therefore, apply

to stockholders or officers acting in their capacity as such.

Second, the General Assembly eliminated the distinction drawn by the Court in

Shenker between managerial and non-managerial director duties by clarifying that section

2-405.1 is the “sole source” of directors’ duties to the corporation and its stockholders

“whether or not a decision has been made to enter into an acquisition or a potential

acquisition of control of the corporation or enter into any other transaction involving the

corporation.” CA § 2-405.1(i).

Third, the General Assembly deleted subsection (g) from the prior version of the

statute, which stated that “[n]othing in this section creates a duty of any director of a

corporation enforceable otherwise than by the corporation or in the right of the

corporation.” The elimination of this subsection removed the impediment to a direct action

against a director by a stockholder who suffers an injury distinct from that of the

corporation.

(i) This section:

(1) Is the sole source of duties of a director to the corporation or the

stockholders of the corporation, whether or not a decision has been

made to enter into an acquisition or a potential acquisition of control

of the corporation or enter into any other transaction involving the

corporation; and

(2) Applies to any act of a director, including an act as a member of a

committee of the board of directors.

17

As owners, stockholders participate in the economic success of the corporation.

One way is through distributions.12 Relevant here, a distribution is “[a] direct or indirect

transfer of money . . . in respect of any of its shares[,]” CA § 2-301(a)(1)(i), and may be

made in the form of a “declaration or payment of a dividend[,]” CA § 2-301(b)(1).

Dividends must be “authorized by [a corporation’s] board of directors . . . subject to any

restriction in its charter and the limitations in [CA § 2-311].” CA § 2-309(b). For example,

a corporation may not make a distribution if doing so would render the corporation unable

to pay its bills as they come “due in the usual course of business.” CA § 2-311(a)(1)(i).

When the board properly authorizes a dividend, unless a subordination agreement

requires otherwise, the stockholder becomes a creditor on the same footing as the

corporation’s other creditors. CA § 2-311(d); see also Heyn v. Fid. Tr. Co., 174 Md. 639,

646-49 (1938). Directors may, under certain circumstances, be held personally liable to

the corporation for improperly authorizing dividends in violation of the standard of care

set forth in CA § 2-405.1. CA § 2-312.

Against the foregoing backdrop, we turn to the causes of action asserted by Edward

in his proposed amended complaint.

Count I – Oppression of Minority Stockholder

Edward alleged that petitioners engaged in “illegal, fraudulent and oppressive”

conduct, entitling him to various forms of equitable relief short of Eastland’s dissolution.

In doing so, he invoked CA § 3-413, which establishes the statutory basis for involuntary

12

Another way is through an increase in the value of the stock.

18

dissolution. Section 3-413(b)(2) provides that “any stockholder entitled to vote in the

election of directors of a corporation may petition a court of equity to dissolve the

corporation on grounds that . . . [t]he acts of the directors or those in control of the

corporation are illegal, oppressive, or fraudulent.”

Though the statute does not define oppression, this Court has described it as

“adverse treatment of minority shareholders in a closely held corporation by those who

wield power within the company.” Bontempo v. Lare, 444 Md. 344, 365 (2015). The term

“closely held corporation” is used to describe a corporation with certain defining attributes,

namely, “(1) a small number of stockholders; (2) no ready market for the corporate stock;

and (3) substantial majority stockholder participation in the management, direction, and

operations of the corporation.” Edenbaum v. Schwarcz-Osztreicherne, 165 Md. App. 233,

257 (2005) (citation omitted). Thus, stockholders of a closely held corporation often

consider themselves co-owners with an active role in its management and an expectation

of continued employment. Id.

Minority stockholders can be vulnerable to “freeze out” tactics of the majority

stockholders. As the court explained in Edenbaum:

[T]he very nature of a closely held corporation makes it possible for a

majority shareholder to “freeze out” a minority shareholder, that is, “‘deprive

a minority shareholder of her interest in the business or a fair return on her

investment.’” “The limited market for stock in a [closely held] corporation

and the natural reluctance of potential investors to purchase a noncontrolling

interest in a [closely held] corporation that has been marked by dissension

can result in a minority shareholder’s interest being held ‘hostage’ by the

controlling interest, and can lead to situations where the majority ‘freeze out’

minority shareholders by the use of oppressive tactics.”

19

165 Md. App. at 257-58 (internal citations omitted). The Court also noted that the

“reasonable expectations view” of oppressive conduct:

[r]ecogniz[es] that a minority shareholder who reasonably expects that

ownership in the corporation would entitle him to a job, a share of the

corporate earnings, and a place in corporate management would be

‘oppressed’ in a very real sense when the majority seeks to defeat those

expectations and there exists no effective means of salvaging the investment.

Id. at 258 (citation omitted).

The Court in Edenbaum also observed that the sole remedy expressly provided

under CA § 3-413 is involuntary dissolution. Due to the drastic nature of a corporate

dissolution, however, the Court held that before ordering a dissolution, courts should first

consider other equitable remedies to rectify the oppressive conduct. 165 Md. App. at

260-61. The Court identified a non-exhaustive list of such potential remedies.13 Id.

13

The list of equitable remedies short of dissolution include:

(a) The entry of an order requiring dissolution of the corporation at a

specified future date, to become effective only in the event that the

stockholders fail to resolve their differences prior to that date;

(b) The appointment of a receiver, not for purposes of dissolution, but to

continue the operation of the corporation for the benefit of all the

stockholders, both majority and minority, until differences are resolved

or “oppressive” conduct ceases;

(c) The appointment of a “special fiscal agent” to report to the court relating

to the continued operation of the corporation, as a protection to its

minority stockholders, and the retention of jurisdiction of the case by the

court for that purpose;

(d) The retention of jurisdiction of the case by the court for the protection of

the minority stockholders without appointment of a receiver or a “special

fiscal agent”;

(e) The ordering of an accounting by the majority in control of the

corporation for funds alleged to have been misappropriated;

20

In Bontempo v. Lare, this Court adopted the reasonable expectations doctrine

articulated in Edenbaum for assessing stockholder oppression claims. 444 Md. at 348.

Under this doctrine, the dashed subjective hopes and desires of the stockholder will not

sustain a claim for oppression. Id. at 366. Conduct is oppressive if it defeats objectively

reasonable expectations that were “central” to the stockholder’s decision to join the

corporation. Id. This Court also endorsed Edenbaum’s requirement that before

considering dissolution, courts should first consider less drastic equitable remedies. Id. at

368-70.

We cautioned, however, that “[a] court acting under CA § 3-413 to fashion a remedy

less drastic than dissolution is not required to match its remedy to an expectation of the

(f) The issuance of an injunction to prohibit continuing acts of “oppressive”

conduct and which may include the reduction of salaries or bonus

payments found to be unjustified or excessive;

(g) The ordering of affirmative relief by the required declaration of a

dividend or a reduction and distribution of capital;

(h) The ordering of affirmative relief by the entry of an order requiring the

corporation or a majority of its stockholders to purchase the stock of the

minority stockholders at a price to be determined according to a specified

formula or at a price determined by the court to be a fair and reasonable

price;

(i) The ordering of affirmative relief by the entry of an order permitting

minority stockholders to purchase additional stock under conditions

specified by the court;

(j) An award of damages to minority stockholders as compensation for any

injury suffered by them as the result of “oppressive” conduct by the

majority in control of the corporation.

Edenbaum, 165 Md. App. at 260-61.

Here, Edward’s proposed amended complaint did not seek dissolution of Eastland,

but rather various equitable remedies, including those drawn directly from the above list

and adopted by this Court in Bontempo (specifically, remedies “b”, “d”, “f”, and “e”).

21

minority shareholder.” Id. at 369. In Bontempo, the trial court found that the minority

stockholder, though an at-will employee, had a reasonable expectation of continued

employment. Id. at 357-58. But, although the trial court granted other equitable remedies

for his defeated expectations, it declined to order the company to reinstate him or pay

employment-related damages. Id. We held that because of his at-will status, his defeated

expectation of continued employment did not require the trial court to order employment-

related relief. Id. at 373-74.

We explained that the reasonable expectations inquiry is a means for “detecting

oppression, but it does not dictate the relief that an equity court is to grant.” Id. at 371.

Thus, we stated: “To hold that the court abused its discretion and that [the minority

stockholder] was entitled to employment-related relief—whether reinstatement or

[monetary damages]—would be to convert a discretionary equitable remedy into a

substantive legal right.” Id. at 374. In other words, a minority stockholder’s at-will status

precludes him from asserting a legal entitlement to employment relief, but does not

preclude him from seeking other forms of equitable relief. In fashioning relief, courts

should consider a variety of factors and interests beyond the defeated expectations of the

oppressed stockholder, including the interests of “other shareholders, its management,

employees, and customers.”14 Id. at 370.

14

Even if a minority stockholder of a closely held corporation alleges a reasonable

expectation of continued employment at the time he became a stockholder and is

subsequently terminated, it does not necessarily follow that the termination of his at-will

employment would alone support an oppression claim and entitlement to equitable relief.

Reasonable expectations notwithstanding, a minority stockholder who is employed at will

22

We turn now to petitioners’ arguments on appeal. Citing the absence of allegations

that Edward had an agreement that spelled out his rights as an employee or stockholder,

petitioners argue that Edward alleged “nothing more than subjective hopes, desires, and

disappointment.” They argue that, in the absence of an agreement stating otherwise,

Edward was an at-will employee and therefore not entitled to equitable relief under

Bontempo and Edenbaum.

Petitioners also argue that Edward “could not have had reasonable expectations in

committing his capital to Eastland because he never alleged that he made such a

commitment.” They argue he never invested time or money in Eastland, but rather, “his

family gave him shares.”

Crediting Edward’s allegations and the reasonable inferences drawn therefrom; we

conclude that Edward’s proposed amended complaint states a cause of action for

stockholder oppression. To recap: Eastland is a family-owned and operated business

founded by Edward’s father. Only family members have been involved in Eastland’s

might be subsequently terminated by the board of directors for legitimate business reasons

that would not alone support an oppression claim. Such claims must be determined on the

specific facts and circumstances of the case, which is why Edenbaum and Bontempo

emphasize the flexibility and discretion courts of equity have in determining what, if any,

remedies are appropriate. Here, we conclude only that the totality of the facts and

circumstances alleged by Edward in his proposed amended complaint suffice to state a

cause of action.

Notably, here, although Edward alleges a reasonable expectation of continued

employment, he does not request the court to restore him to his former position or award

him back-pay. The equitable relief he seeks short of dissolution appears to be directed at

protecting his expectation of sharing in Eastland’s profits.

23

management and operations, and until December 31, 2008, Edward’s parents were the only

stockholders.

Edward first worked for the company as a child. As an adult, he embarked on an

engineering career but was soon recruited to Eastland by his father, with promises of

employment, managerial responsibilities, and ownership. He joined the company, and was

soon promoted to Vice-President and elected to the board of directors. Then, on December

31, 2008, as promised by his father, he became a stockholder of Eastland at the same time

as his brother Oscar. He first received stock not from his family, as petitioners argue, but

directly from Eastland following an amendment to its articles of incorporation that

authorized the issuance of additional stock. That’s also how Oscar first received stock.

And, Edward received profit distributions the same way as the other stockholders did—

through bonuses determined by Pricha.

Edward has alleged sufficient facts to support the reasonableness of his expectation

that, by virtue of his status as a stockholder, he would have continued employment and

managerial involvement in Eastland. It’s reasonable for the founders of a family-owned

business to structure their business and estate plan to pass along the business—both

management and ownership—to the next generation in the family. It’s also reasonable for

a son who leaves a profession at his father’s request to expect continued employment by

the family-owned business, particularly when the period of employment predating the

issuance of shares could be seen as the father’s test of his son’s commitment and dedication

to the company. Put simply, based on the well-pleaded facts of the proposed amended

complaint, Edward alleged a reasonable expectation—not legal entitlement, but

24

expectation—that continued employment and managerial input as a director would go

along with stock ownership.

Edward likewise pleaded sufficient facts to support a reasonable expectation that he

would receive his share of the distributable profits in accordance with his ownership

percentage. As a general matter, one of the reasons for owning stock in the first place is to

enjoy the fruits of its economic success. James J. Hanks, Jr., Maryland Corporation Law

§ 7.1, at 223 (1994, 2019 Supp.). That alone adds a measure of reasonableness to Edward’s

expectation.

Moreover, before Edward joined the company, his father explained to him the

company’s practice of paying out the company’s profits in the form of bonuses rather than

dividends. His father explained that this practice would continue after Edward became an

owner, and it did. Edward detailed his total compensation from 2000 until his termination

in 2018, including very specific amounts—down to the dollar—of compensation

attributable to profit bonuses once he became a stockholder.

Until he left the company in August 2017, Pricha ran Eastland as its President and

unilaterally determined the amount of the profit bonuses. After Pricha severed ties in 2017,

the stockholders considered at the 2018 annual stockholders’ meeting whether to abandon

Pricha’s practice of distributing profits through bonuses and instead distribute profits

through dividends. That this topic made its way onto the agenda at this time makes sense.

With Pricha gone, somebody had to decide whether, how, and in what amounts profits

should be distributed to Eastland’s stockholders. And, under Maryland law, that

“somebody” is supposed to be the board of directors, CA § 2-309(b), and the “how” is

25

supposed to be by dividends, CA § 2-301. Although the stockholders apparently did not

move to a dividend model, taken together, these allegations, if proven, support the

inference that from the stockholders’ perspective, the issue wasn’t whether distributable

profits would be paid, but how and how much.15

According to Edward, however, after he was terminated, Eastland stopped

distributing profits through bonuses and refused to distribute profits through dividends.

Instead, Vipa and Oscar drew excessive compensation and diverted corporate funds for

personal use to reduce the company’s profits. As a result of these actions, Edward was

denied all economic benefits attendant to his stock ownership. These allegations suffice to

state a viable cause of action for minority stockholder oppression under the standard

articulated in Edenbaum and adopted in Bontempo.16

15

We qualify “profits” with “distributable” intentionally. A corporation is not

required to distribute profits. That decision is made by the board of directors and, like all

board actions, is subject to the standard of care set forth in CA § 2-405.1. Renbaum v.

Custom Holdings, Inc., 386 Md. 28, 54 n.22, 55 (2005). The board of directors may

determine, in the exercise of its business judgment, that some or all of the profits should

be reserved for a variety of legitimate business purposes. See CA § 2-304.

16

A few words about the Appellate Court’s use of the concept of “de facto

dividends.” The Court framed the issue as “whether the de facto dividend claimed by

[Edward], or the majority shareholders’ refusal to expressly declare a dividend, could be

an objectively reasonable expectation by him, according to the circumstances set out in the

complaint.” Mekhaya, 256 Md. App. at 519. The Court stated that although the Maryland

statutes “do not recognize expressly a ‘de facto’ dividend,” nor do they “foreclose such a

dividend.” Id.

Although, when considered in context, the Appellate Court’s use of the phrase “de

facto dividend” does not upend Maryland law, as petitioners argue, we believe such use

was unnecessary to resolve the issue before the Court and we therefore discourage its use.

By suggesting that the MGCL does not “foreclose such a dividend,” the Court introduced

26

Should Edward prove his oppression claim at trial, the court may impose appropriate

equitable relief short of dissolution, consistent with the principles expressed by this Court

in Bontempo.17 Accordingly, because the proposed amendment to Count I would not have

the possibility that Maryland law permits corporations to pay dividends outside of the

statutory parameters of the MGCL. Therefore, nothing in this or the Appellate Court’s

opinion should be interpreted as altering or creating exceptions to the statutory framework

governing the authorization and payment of dividends by Maryland corporations.

17

In adjudicating this claim and, if it comes to that, in fashioning equitable relief,

the court should differentiate between actions taken in an individual’s official capacity as

a director and those taken as a stockholder. As discussed above, actions taken by the board

of directors are subject to the provisions of CA § 2-405.1. So, for example, if Tisnai, who

is not alleged to be a stockholder, acted in his official capacity as a director, his conduct

would be subject to section 2-405.1.

The analysis is more complicated with respect to Vipa and Oscar, who collectively

own a majority of Eastland’s stock and serve as directors. Section 2-405.1 applies to their

conduct taken in their official capacity as directors, but not for wielding power enjoyed by

virtue of their collective majority in stock ownership. In that regard, under Maryland law,

“minority shareholders are entitled to protection against the fraudulent or illegal action of

the majority. When a majority stockholder abuses its power, a minority stockholder is

entitled to appropriate relief.” Lerner v. Lerner Corp., 132 Md. App. 32, 53 (2000)

(internal citation omitted). When the majority stockholders are also board members—as

is often the case in closely held corporations—conduct in violation of CA § 2-405.1 might

also give rise to an oppression claim under CA § 3-413, and vice versa. Nevertheless, we

do not rule out the possibility that certain conduct could be insulated from liability under

CA § 2-405.1 and, at the same time, sustain an oppression claim under CA § 3-413.

Because we are only concerned with the legal sufficiency of the proposed amended

complaint, we will not speculate whether this is such a case.

Here, Edward alleges in conclusory fashion that Vipa’s and Oscar’s actions were

taken as directors and as majority stockholders. Certain actions of which Edward

complains are, in the absence of provisions of the articles of incorporation, bylaws, or

stockholder agreements to the contrary, vested by the MGCL in the board of directors.

When a stockholder complains of an action vested in the board of directors, unless the

stockholder can allege facts which, if proven true, show that such actions were not taken

by board of directors, then the plaintiff stockholder must allege facts that overcome the

presumption afforded directors under CA § 2-405.1. Edward’s proposed complaint does

27

been futile, the circuit court erred by dismissing Count I with prejudice and denying

Edward leave to amend that count pursuant to his proposed amended complaint.

Count II – Breach of Fiduciary Duty

Edward alleges that, as directors of Eastland, Oscar, Vipa, and Tisnai owe fiduciary

duties to Eastland and its stockholders. He also alleges that Oscar and Vipa, as majority

stockholders, owe him fiduciary duties as well. The factual basis for Edward’s breach of

fiduciary duty claim is essentially the same as his oppression claim, specifically, Oscar’s

and Vipa’s excessive compensation, diversion of corporate funds for personal use, and

taking of profits without paying Edward his rightful share.

Petitioners argue that Edward has improperly sued in his individual capacity for

injuries allegedly suffered by the corporation. To pursue this claim, they argue, Edward

was required to bring a derivative claim on behalf of Eastland, not a direct claim against

Vipa, Oscar, and Tisnai. Petitioners also argue that Edward hasn’t pleaded sufficient facts

to overcome the presumption under CA § 2-405.1 that the directors, in deciding whether

to authorize dividends, complied with the standard of care.

We will briefly dispense with petitioners’ argument that Edward has not alleged

facts to overcome section 2-405.1’s presumption. A presumption is just that—a

not clarify whether the actions he complains of were taken by the board of directors or by

Vipa and Oscar without proper authorization from the board. Ordinarily, this lack of

specificity could give rise to a motion to dismiss or, perhaps, a motion for more definite

statement. However, for the same reasons discussed below in connection with our

discussion of Count II, Edward’s allegations suffice at the pleading stage to overcome the

presumption afforded under CA § 2-405.1, so the lack of specificity does not render his

pleading defective. Whether he can adduce the evidence in discovery to prove those

allegations and overcome that presumption is not before us.

28

presumption. If Edward had alleged only that the company was profitable and the board

refused to authorize a dividend, such a bare allegation would not overcome the

presumption. But he has alleged more than that. In a nutshell, Edward has alleged that the

directors have permitted Oscar and Vipa to loot the company by taking corporate funds for

personal use. He also alleges that they have excluded him from sharing in the company’s

profits while allowing Oscar and Vipa to take profits through excessive compensation. At

the pleading stage, these allegations suffice to overcome section 2-405.1’s presumption

that the directors complied with the standard of care.

We agree with petitioners, however, that Edward has not stated direct claims for

breach of fiduciary duties for compensatory damages against Oscar, Vipa, and Tisnai for

the alleged excessive payments (compensation or otherwise) made to Vipa and Oscar.

Edward argues that he is entitled to pursue a direct claim because section 2-405.1 expressly

acknowledges that directors owe duties to stockholders. And he also argues that he has a

direct claim under the common law rule that majority stockholders owe fiduciary duties to

minority stockholders. See Lerner v. Lerner Corp., 132 Md. App. 32, 53 (2000) (“A

majority stockholder in a close corporation owes a fiduciary obligation not to exercise that

control to the disadvantage of minority stockholders.”). Although both statements

correctly articulate the law—indeed Edward’s proposed amended complaint faithfully

parrots the standard of care under section 2-405.1 and Lerner v. Lerner’s articulation of the

majority stockholders’ duty to minority stockholders—the defects in his pleading lie

elsewhere.

29

First, the cases addressing the fiduciary duties owed by majority stockholders to

minority stockholders do not hold that such duties give rise to direct actions for

compensatory damages. Rather, Lerner, which observed that minority stockholders were

entitled to “protection against the fraudulent or illegal action of the majority[,]” involved,

among other things, a claim for rescission of a reverse stock split that effectively eliminated

a minority stockholder. 132 Md. App. at 53. In describing such fiduciary duties, Lerner

relied on Mottu v. Primrose, 23 Md. 482, 496-98 (1865), which also involved a claim in

equity to invalidate the board of directors’ attempt to extend their term in office. Lerner,

132 Md. App. at 53. Lerner also relied on Baker v. Standard Lime & Co., 203 Md. 270,

274-77 (1953), which involved a claim by minority stockholders for various forms of

equitable relief, not compensatory damages, arising out of amendments to the corporate

charter, the authorization of preferred stock, purchase and retirement of common stock,

and a stock split. Lerner, 132 Md. App. at 53. And finally, Lerner relied on Twenty Seven

Trust v. Realty Growth Investors, 533 F. Supp. 1028, 1029 (D. Md. 1982), which involved

a federal securities claim. Lerner, 132 Md. App. at 53. In Twenty Seven Trust, the court

relied on Maryland law’s recognition of the majority stockholder’s duties to the minority

stockholders to establish that the breach of such duties gives rise to claims for equitable

relief by minority stockholders. 533 F. Supp. at 1034-35. Thus, under the circumstances

alleged by Edward here, recourse for the majority stockholder’s breach of fiduciary duties

would lie in his oppression count.

Second, to the extent Edward alleges that the board of directors duly authorized

Eastland to distribute profits to its stockholders (however couched) and Edward did not

30

receive his rightful share, then his claim for compensatory damages would be against

Eastland, as the party statutorily responsible for making that payment. CA § 2-311(d); see

also Heyn, 174 Md. at 646-49 (characterizing an unpaid distribution as a debt of the

corporation). Edward did not name Eastland as a defendant in Count II.

Third, to the extent Oscar and Vipa misused corporate funds, either by taking

excessive compensation, taking distributions in excess of their rightful share, or by

pocketing corporate funds for personal use, the injury was sustained by the corporation,

not Edward personally. See Mona, 176 Md. App. at 705. Edward, as a minority

stockholder, did not suffer an injury distinct from Eastland’s that could sustain a claim for

compensatory damages, which is the only remedy Edward sought in Count II. As a result

and because he did not sue derivatively on behalf of Eastland, the court properly dismissed

this count.18 Id.

In Waller v. Waller, this Court discussed the importance of distinguishing between

claims belonging to the individual (direct claims) and claims belonging to the corporation:

It is a general rule that an action at law to recover damages for an injury to a

corporation can be brought only in the name of the corporation itself acting

through its directors, and not by an individual stockholder though the injury

may incidentally result in diminishing or destroying the value of the stock.

The reason for this rule is that the cause of action for injury to the property

of a corporation or for impairment or destruction of its business is in the

corporation, and such an injury, although it may diminish the value of the

capital stock, is not primarily or necessarily a damage to the stockholder, and

hence the stockholder’s derivative right can be asserted only through the

corporation. The rule is advantageous not only because it avoids a

multiplicity of suits by the various stockholders, but also because any

damages so recovered will be available for the payment of debts of the

18

Because the issue is not before us, we do not address whether such a claim would

lie if Edward sought equitable remedies instead of compensatory damages.

31

corporation, and, if any surplus remains, for distribution to the stockholders

in proportion to the number of shares held by each.

Generally, therefore, a stockholder cannot maintain an action at law against

an officer or director of the corporation to recover damages for fraud,

embezzlement, or other breach of trust which depreciated the capital stock or

rendered it valueless. Where directors commit a breach of trust, they are

liable to the corporation, not to its creditors or stockholders, and any damages

recovered are assets of the corporation, and the equities of the creditors and

stockholders are sought and obtained through the medium of the corporate

entity. . . . The rule is applicable even when the wrongful acts were done

maliciously with intent to injure a particular stockholder. It is immaterial

whether the directors were animated merely by greed or by hostility toward

a particular stockholder, for the wrongdoing affects all the stockholders alike.

187 Md. 185, 189-91 (1946) (citations omitted).

A direct action is appropriate only where the board has breached a duty owed

directly to the shareholder and the shareholder has suffered “an injury that is separate and

distinct from any injury suffered either directly by the corporation or indirectly by the

stockholder because of the injury to the corporation.” Oliveira v. Sugarman, 451 Md. 208,

240, 244-45 (2017) (quoting James J. Hanks, Jr., Maryland Corporation Law § 7.12(b), at

276.18). Otherwise, the claim belongs to the corporation, and if the directors improperly

fail to pursue it, stockholders may pursue a derivative claim on the corporation’s behalf.19

19

Ordinarily, directors have the sole discretion to initiate litigation to enforce a

corporate right. Werbowsky, 362 Md. at 599. A derivative action is “an extraordinary

equitable device,” id., which “place[s] in the hands of the individual shareholder a means

to protect the interests of the corporation from the misfeasance and malfeasance of

‘faithless directors and managers,’” Danielewicz v. Arnold, 137 Md. App. 601, 626 (2001)

(quoting Cohen v. Beneficial Loan Corp., 337 U.S. 541, 548 (1949)). Because Edward did

not assert a derivative claim, we need not address or summarize the procedural steps and

requirements of such claims.

32

Claims for excessive compensation and other misuses or diversions of corporate

funds belong to the corporation, not the stockholders. In Mona v. Mona Electric Group,

Inc., where the majority stockholder allegedly used excessive compensation to reduce

profits and deprive dividends to the minority stockholder, the Appellate Court explained:

What [the minority stockholder] does not adequately address, however, is

how the injury for which he sought damages—the alleged overpayment of

compensation to [the majority stockholder] by the company—was personal

to him. It does not follow that, merely because [the company] has two

shareholders, . . . an overpayment of compensation to [the majority

stockholder] is a loss to [the minority stockholder]. [The majority

stockholder’s] compensation was paid to him by [the company] for his role

as an officer of the company. Any wrongful overpayment by the company

of compensation to an officer is at most a loss to the company.

176 Md. App. at 705.

The distinction between direct and derivative claims preserves the allocation of

duties and responsibilities entrusted to the board of directors under the MGCL. As

discussed above, the board’s managerial oversight responsibilities include setting

executive compensation and declaring dividends. If directors violate the standard of care

imposed by CA § 2-405.1 in either of these functions, the injury would be to the corporation

because such payments would deprive the corporation of funds that could have been

deployed for other legitimate business purposes. Thus, if the recovery is had by the

corporation instead of the individual stockholder, the corporation’s board of directors

would then be required to exercise its managerial discretion, consistent with the standards

set forth in CA § 2-405.1, to determine what to do with the recovered funds. Such judgment

should be based on the facts and circumstances that exist at the time the recovered funds

are received. For example, the board could decide to pay dividends, reserve funds for

33

future expansion, or raise executive pay. In contrast, a direct action by Edward, if

successful, would transfer corporate funds from the majority stockholders to the minority

stockholder in circumvention of the board of directors’ oversight responsibilities, which

fails to remedy the injury to Eastland. See, e.g., Bontempo v. Lare, 217 Md. App. 81, 128-

30 (2014), aff’d, 444 Md. 344 (2015). Claims of this nature, therefore, belong to the

corporation, not to the minority stockholder.

Because Edward did not have a viable direct claim for compensatory damages and

did not pursue Count II as a derivative claim on Eastland’s behalf, the circuit court correctly

dismissed Count II of the complaint with prejudice and without leave to amend.

Count III – Unjust Enrichment

A cause of action for unjust enrichment consists of three elements: “(1) [a] benefit

conferred upon the defendant by the plaintiff; (2) [a]n appreciation or knowledge by the

defendant of the benefit; and (3) [t]he acceptance or retention by the defendant of the

benefit under such circumstances as to make it inequitable for the defendant to retain the

benefit without the payment of its value.” Berry & Gould, P.A. v. Berry, 360 Md. 142, 151

(2000) (internal quotation marks and citation omitted); see also Hill v. Cross Country

Settlements, LLC, 402 Md. 281, 295 (2007) (identifying the same three elements).

Damages in an unjust enrichment action are measured by the gain to the defendant and not

by the loss to the plaintiff. Mogavero v. Silverstein, 142 Md. App. 259, 276 (2002). This

is so because an unjust enrichment claim “is not aimed at compensating the plaintiff, but

at forcing the defendant to disgorge benefits that it would be unjust for him to keep.” Hill,

402 Md. at 296.

34

Edward’s claim for unjust enrichment against Oscar and Vipa is predicated on the

same facts supporting his breach of fiduciary duty claim. The result is the same, and for

the same reason: the benefits of excessive compensation and funds for personal use came

at the corporation’s expense, not Edward’s directly. Accordingly, having asserted Count

III in his individual capacity instead of derivatively on Eastland’s behalf, the circuit court

did not err in dismissing Count III with prejudice and without leave to amend.

CONCLUSION

Edward’s proposed amended complaint set forth sufficient facts to state a claim for

stockholder oppression under Maryland law. The proposed amended complaint did not,

however, allege sufficient facts to support Edward’s direct causes of action for breach of

fiduciary duty and unjust enrichment. Accordingly, we shall remand the case to the

Appellate Court with instructions to remand the case to the circuit court for further

proceedings consistent with this opinion.

JUDGMENT OF THE APPELLATE

COURT OF MARYLAND

AFFIRMED IN PART AND

REVERSED IN PART. CASE

REMANDED TO THE APPELLATE

COURT WITH INSTRUCTIONS TO

REMAND TO THE CIRCUIT

COURT FOR HOWARD COUNTY.

50 PERCENT OF THE COSTS TO BE

PAID BY PETITIONERS, AND 50

PERCENT TO BE PAID BY

RESPONDENT.

35

Circuit Court for Howard County

Case No.: C-13-CV-21-000666

Argued: June 2, 2023

IN THE SUPREME COURT

OF MARYLAND*

No. 37

September Term, 2022

EASTLAND FOOD CORPORATION, et al.

v.

EDWARD MEKHAYA

Fader, C.J.,

Watts,

Hotten,

Booth,

Biran,

Gould,

Eaves,

JJ.

Concurring Opinion by Booth, J., which Fader,

C.J., joins.

Filed: August 31, 2023

* At the November 8, 2022 general election, the

voters of Maryland ratified a constitutional

amendment changing the name of the Court of

Appeals of Maryland to the Supreme Court of

Maryland. The name change took effect on

December 14, 2022.

Respectfully, I concur with the Majority’s analysis and conclusion that the

Amended Complaint did not allege sufficient facts to support Count III, a claim for unjust

enrichment. Pertaining to Counts I and II, I analyze these statutory claims differently than

the Majority, and, therefore, do not join those portions of the opinion that discuss Counts I

and II. I write separately to explain my analysis.

In this case, we must determine whether Edward has alleged sufficient facts

necessary to overcome the Defendants’ motion to dismiss. Specifically, we must determine

whether Edward’s Amended Complaint adequately sets forth a cause of action against the

Defendants under the Maryland General Corporation Law (sometimes referred to as the

“MGCL”).1 The Defendants are: Eastland Food Corporation (“Eastland”), a Maryland

corporation formed under the MGCL; Oscar Mekhaya (“Oscar”) and Vipa Mekhaya

(“Vipa”), as officers and directors of Eastland; and Tisnai Thaitam, (“Tisnai”) as a director

of Eastland. Edward, Vipa, and Oscar are stockholders. Tisnai is not a stockholder.

We conduct a de novo review of matters of statutory interpretation, as well as

whether a trial court’s decision to grant a motion to dismiss was legally correct. Wheeling

v. Selene Finance, LP, 473 Md. 356, 373–74 (2021). Under Maryland Rule 2-322(b)(2),

the court may dismiss a complaint if it fails “to state a claim upon which relief can be

granted.” This Court has explained that “[a] motion to dismiss is properly granted if the

factual allegations in a complaint, if proven, would not provide a legally sufficient basis

1

The Maryland General Corporation Law, or “MGCL”, is comprised of Titles 1

through 3 of the of the Corporations and Associations Article of the Maryland Code (2014

Repl. Vol, 2022 Supp.) (“CA”).

for the cause of action asserted in the complaint.” Wheeling, 473 Md. at 374. We “assume

the truth of all relevant and material facts that are well pleaded and all inferences which

can reasonably be drawn from those pleadings.” Id. (quotations omitted). “A motion to

dismiss on this ground may only be granted where the allegations presented do not state a

cause of action.” Id. In Wheeling, we reiterated that, “[i]n determining whether a plaintiff

has alleged claims upon which relief can be granted, there is a big difference between that

which is necessary to prove the elements, and that which is necessary to merely allege

them.” Id. (citations omitted). “Indeed, our decision does not ‘pass on the merits of the

claim,’ but instead, we merely ‘determine[] whether the plaintiff’s right to bring the

action.’” Id. (quoting Lloyd v. General Motors Corp., 397 Md. 108, 122 (2007)) (alteration

in original).

The general rule governing sufficiency of pleadings is set forth in Maryland Rule

2-303(b), which states that:

Each averment of a pleading shall be simple, concise, and direct. No

technical forms of pleadings are required. A pleading shall contain only such

statements of fact as may be necessary to show the pleader’s entitlement to

relief or ground of defense. It shall not include argument, unnecessary

recitals of law, evidence, or documents, or any immaterial, impertinent, or

scandalous matter.

Under Maryland’s liberal pleading standard, “a plaintiff need only state such facts

in his or her complaint as are necessary to show an entitlement to relief.” Johns Hopkins

Hosp. v. Pepper, 346 Md. 679, 698 (1997). As I will discuss in more detail, this case

involves the application of the business judgment rule that has been codified by the General

Assembly in Section 2-405.1 of the Corporations and Associations Article of the Maryland

2

Code (“CA”) (2014 Repl. Vol, 2022 Supp.). When a complaint involves the application

of the business judgment rule that applies to corporate acts undertaken by its directors, the

plaintiff must plead sufficient facts to overcome the presumption of the rule in the

complaint. See, e.g., Oliveira v. Sugarman, 451 Md. 208, 246 (2017) (stating that the

petitioners’ “claims were properly dismissed by the Circuit Court for failure to overcome

the business judgment rule presumption”). The presumption does not end the inquiry, but

merely places the burden upon the person attacking the directors’ decision to prove a lack

of good faith or absence of an informed basis for the challenged decision.

Starting with the four corners of the Amended Complaint, Edward alleges facts that

are common to all counts, and sets forth three specific claims—two of which are statutory

claims arising under the MGCL and one claim arising under common law.

I

A. The Amended Complaint – Facts Common to All Counts

In 1999, Edward’s father, Pricha Mekhayarajjananonth (“Pricha”), asked Edward to

work for Eastland. If Edward agreed to come work for Eastland, Pricha explained that

Edward would become an owner of Eastland, and once he was an owner, he would be paid

as such. Pricha explained to Edward that

the compensation structure for the owners of [] Eastland includes the

sharing of the profits of [] Eastland with each owner receiving a percentage

of profits paid as a bonus after the end of each fiscal year instead of declared

dividends. While employees may also receive discretionary bonuses, the

sharing of profits paid as a bonus instead of declared dividends was limited

to the owners of [] Eastland.

3

Edward alleges that when he accepted employment with Eastland in 1999, the expectation

of continuous employment, participation in Eastland’s management, and receipt of

Eastland’s profits as an eventual owner were central to his decision to join Eastland.

Edward contends that these expectations were reasonable under the circumstances

because, among other reasons: (1) Eastland existed as a family-run business with only

members of Edward’s family involved in its management and operation; (2) Edward’s

parents, Pricha and Vipa, were Eastland’s only owners; and (3) Pricha and Vipa knew

Edward would be foregoing the opportunity to continue his promising engineering career

to join Eastland.

Edward describes the many contributions that he made to Eastland as an

employee. From April 1996 until December 2008, Pricha and Vipa were Eastland’s

sole stockholders, each owning a 50% interest in the company. On December 31, 2008,

Pricha and Vipa caused Eastland to issue shares of stock to Edward and his brother,

Oscar. As a result of the stock transactions, as of December 31, 2008, Edward and his

brother, Oscar, each owned 15% of Eastland’s outstanding stock, and Vipa and Pricha

each owned 35%. In November 2015, Pricha ceased being a stockholder and agreed

that Eastland would redistribute his stock interest in Eastland. As a result of the 2015

stock transactions, Eastland’s outstanding stock is owned as follows: Edward and Oscar

each own 28%; Vipa owns 35%; and a trust established for Oscar’s three children owns

9%.

In the Amended Complaint, Edward sets forth his annual compensation from

Eastland between 2006 and 2018, which reflects a considerable salary increase in 2008

4

when he received his initial stock in Eastland and another considerable increase in 2015

when he received additional stock in the corporation. He includes the following table:

Edward’s Annual Compensation from Eastland (2006–2018)

Year Annual Compensation

2006 $310,132

2007 $291,880

2008* $457,376

2009 $491,655

2010 $454,835

2011 $468,537

2012 $492,382

2013 $460,855

2014 $484,648

2015** $603,117

2016 $609,594

2017 $592,098

2018*** $392,813

* Edward became a stockholder.

** Edward’s stock ownership increased.

*** Edward’s employment with Eastland was terminated in October, 2018.

Edward alleged that, consistent with Pricha’s 1999 explanation of the stockholders’

compensation structure, which was practiced by Eastland when Edward received his 2008

stock ownership, and his additional 13% stock ownership in 2015, his total compensation

set forth in the chart above includes the following profits of Eastland that were paid to

Edward in the form of a bonus instead of as a declared dividend:

5

Bonuses Paid to Edward from Eastland

Date Received Profit Paid as a Bonus Instead of

as a Declared Dividend

3/25/2010 $28,783

3/24/2011 $137,500

3/29/2012 $153,149

4/11/2013 $131,537

3/27/2014 $129,991

3/26/2015 $192,734

3/31/2016 $191,055

4/21/2017 $195,933

4/06/2018 $49,678

Edward alleges that he expected that his: (1) employment with Eastland; (2)

participation in the management of Eastland; and (3) receipt of Eastland’s profits would

continue for the duration of the corporation’s existence.

Until August 2017, Pricha led and managed Eastland as its President and as a

director. Pricha also determined the amount of Eastland’s profit that each stockholder

would receive as a bonus instead of a declared dividend. In August 2017, Eastland’s

“stockholders and directors” removed Pricha as a director and officer “for various reasons

documented in the corporate minutes[.]” Among other things, Pricha had moved to

Thailand and was not likely to return to the United States. In September 2017, Oscar was

elected as Eastland’s President, over Edward’s objection.2 In August 2018, Edward signed

a directors’ consent approving a credit line increase for Eastland “under express written

2

Edward alleges that he objected to his brother being President because, among

other things, Oscar: (1) lacked management experience; and (2) was not good with

employees, and would become upset and emotional when employees would tell him what

he did not want to hear, resulting in a high employee turnover rate.

6

protest.” Edward argued that the corporation’s “management” was growing inventory “at

an alarming rate.”

On or about October 2, 2018—prior to an October 12, 2018, stockholder meeting—

Raymond Sherbill, an attorney who represented Eastland, sent an email to Edward’s

attorney at that time, bearing the subject “Annual Meeting” and attaching a “Notice of

Annual Shareholder and Regular Director Meeting.” In the body of the email, Mr. Sherbill

wrote, in part:

Per our call just now, attached is a draft notice of meeting of the board and

stockholders for next week. . . . The anticipated draft agenda is: financial

report, sales, Sapphire/IT developments, competitive environment,

purchasing controls, and hopefully introduction of a dividend study

(advantages to moving to shareholders getting dividends with respect to their

ownership in lieu of salaries being paid as if they were dividends.) I

anticipate that RSM McGladrey, EFC’s auditors and accountants, will be

there . . .

Edward asserts that, as of the October 2, 2018, email, Edward, Oscar, and Vipa, as

stockholders and directors of Eastland, together with Eastland’s attorneys and accountants,

had direct knowledge of Eastland’s long-standing practice of paying its profits in the form

of bonuses to its stockholders instead of as a declared dividend.

On October 10, 2018, Edward sent an email to Uma Tuchinda, Eastland’s Human

Resources Manager, requesting the past 3 years of payroll data for all employees, including

Oscar and Vipa, along with any “bonuses, special pay and monies transferred to

employees” including Oscar and Vipa. On the same day, Ms. Tuchinda replied, stating

that she had checked with Oscar and that Oscar would not allow Ms. Tuchinda to provide

the requested payroll information to Edward.

7

Edward attended the Eastland stockholders’ meeting on October 12, 2018,

accompanied by his attorney. The meeting included a discussion concerning changes to

the bylaws, the status of operations, election of directors, and the dividend study. By the

close of the meeting, Edward was not re-elected to the board of directors, “without cause

or reason.” On October 15, 2018, “Eastland and the other stockholders” terminated

Edward’s employment with Eastland, “without cause and without reason.”

After Edward’s employment was terminated and he was removed from the board of

directors, Eastland did not consider the dividend study, and Eastland has failed to pay

Edward a portion of the company’s profits as a bonus instead of as a declared dividend

despite Edward’s continued status as a stockholder.

As of October 2018, Eastland had three directors: Oscar, Vipa, and Tisnai. The

Amended Complaint does not state when Tisnai became a director. However, as a director

of Eastland, he is individually named as a defendant in this case.

B. Specific Counts in the Amended Complaint

Count I – Oppression of Minority Shareholder

Count I is a statutory claim filed under CA § 3-413(a) against the “Defendants[,]”

which seeks monetary damages and equitable relief (as specifically set forth in the prayers

for relief pertaining to Count I, which I describe below), alleging that the “acts of

Defendant Eastland’s directors and other stockholders are illegal, fraudulent[,] and

oppressive conduct as proscribed by” CA § 3-413. Edward asserts that the “illegal,

fraudulent[,] and oppressive conduct substantially defeats” his “reasonable expectations as

a minority stockholder,” and constitute acts to “squeeze [him] out.”

8

To support this statutory claim, Edward asserts the following:

• That his expectations of continued employment, participation in

management, and the payout of Eastland’s profits “were central to” his

decision to join Eastland, and were reasonable under the circumstances.

• That he had a reasonable expectation that, after becoming a stockholder,

he would not be summarily removed from Eastland’s employment and

management.

• Edward had, and continues to have, a reasonable expectation that, after

becoming a stockholder, he would receive a share of Eastland’s profits,

regardless of his employment or management status with Eastland.

• The Defendants pay Oscar and Vipa excessively high salaries and other

compensation, and allow them to use Eastland’s funds for their personal

use and gain as a scheme to divert Eastland’s profits from Edward to

Oscar and Vipa.

• Since terminating Edward’s employment with Eastland and his removal

from the board of directors, the Defendants have not and will not: (1)

declare and pay a dividend to Edward; or (2) pay a portion of Eastland’s

profits to Edward as a “bonus instead of as a declared dividend contrary

to the compensation structure” for Eastland’s owners as explained to

Edward by Pricha before Edward originally became a stockholder and “as

practiced by” Eastland when Edward received an additional stock interest

in Eastland in November 2015.

In summary, Count I alleges that the individually named Defendants engaged in

conduct in violation of CA § 3-413(b)(2), asserting that these Defendants have frustrated

Edward’s reasonable expectations as a stockholder by engaging in oppressive conduct

consisting of: (1) terminating his employment; (2) removing him from the board of

directors; (3) diverting Eastland’s profits from Edward to Oscar and Vipa; (4) refusing to

declare and pay Edward dividends; and (5) refusing to pay Eastland’s profits to Edward as

a bonus instead of a declared dividend, thereby causing him damages.

9

In addition to seeking compensatory money damages, Edward is seeking a panoply

of equitable remedies that this Court has determined may be available to a minority

stockholder who establishes a violation of CA § 3-413(b)(2), as an alternative to

involuntary dissolution—which is the only remedy set forth by the General Assembly for

a violation of that section. See Bontempo v. Lare, 444 Md. 344 (2015); see also Edenbaum

v. Schwarcz-Osztreicherne, 165 Md. App. 233 (2005). Specifically, Edward seeks an order

providing one or more of the following remedies: (1) the appointment of a receiver, not for

purposes of dissolution, but to continue the operation of Eastland for the benefit of all

stockholders until the “oppressive” conduct ceases, with the court assuming continuing

jurisdiction; (2) the issuance of an injunction to prohibit continuing acts of “oppressive”

conduct, including, without limitations, Eastland from paying excessive salaries and other

compensation to Oscar and Vipa as a scheme to divert Eastland’s profits from Edward; (3)

an injunction directing Defendants to declare and pay dividends for the calendar years

2018, 2019, and 2020; (4) the issuance of an injunction directing Defendants to pay

Eastland’s profits to Edward in the same form as those profits that are distributed to other

stockholders; (5) an accounting to Edward of all income, expenses, profits, liabilities,

assets, and transactions of Eastland; and (6) other equitable relief as a result of the illegal,

fraudulent, and oppressive conduct proscribed by CA § 3-413.

Count II – Breach of Fiduciary Duty

Count II alleges “breach of fiduciary duties” against Oscar, Vipa, and Tisnai as the

directors of Eastland. Although this Count has been characterized by the parties, the lower

court, and the Majority as a “breach of fiduciary duty” count, for reasons I explain below,

10

and to avoid inserting confusing concepts of “fiduciary” duties into this discussion, I will

refer to Count II as Edward’s statutory claim against the directors—Oscar, Vipa, and

Tisnai—for a violation of the directors’ statutory standard of conduct arising under

CA § 2-405.1(c). Although it is titled a “breach of fiduciary duty” claim, in substance,

Edward is alleging that Eastland’s directors violated their statutory standard of conduct that

a director owes to a corporation and its stockholders. That standard, commonly referred to

as the “business judgment rule,” requires that a director act: (i) in good faith, (ii) in a

manner each reasonably believes to be in the best interests of the corporation, and (iii) with

the care that an ordinarily prudent person in a like position would use under similar

circumstances. CA § 2-405.1(c). In Count II, Edward alleges that Oscar, Vipa, and Tisnai

violated this standard, and further asserts that the standard requires that the directors act in

a manner that benefits “all stockholders equally and not in furtherance of their personal

interest or benefit.” Edward also alleges that Oscar and Vipa, “as the majority

stockholders” of Eastland, both owe “fiduciary duties” to Edward as a minority

stockholder, not to exercise their control over Eastland to Edward’s disadvantage. Edward

generally alleges that the “Defendants have breached their fiduciary duties” to him.

Edward alleges breaches by Oscar, Vipa, and Tisnai as directors of Eastland, and

against Oscar and Vipa as majority stockholders. Pertaining to the directors, Edward

alleges that that the directors: (1) authorized Eastland to pay excessively high salaries and

other compensation to Oscar and Vipa to divert profits of Eastland from Edward; (2)

authorized profits of Eastland to be paid to Oscar and Vipa without payment of profits to

Edward; and (3) otherwise breached their fiduciary duties as Eastland’s directors. Edward

11

alleges the same breaches by Oscar and Vipa “as majority [stockholders]” for the same

conduct that he alleges they undertook in their capacities as directors. Edward alleges that

the actions taken by Oscar, Vipa, and Tisnai were not undertaken in good faith, nor in a

manner reasonably believed to be in the best interests of Eastland, nor with the care that an

ordinarily prudent person in a like position would use under similar circumstances. As for

Count II, Edward seeks compensatory damages in an amount exceeding $75,000, to be

determined at trial.

Count III—Unjust Enrichment

Count III alleges unjust enrichment against Oscar and Vipa. To support this count,

Edward asserts that Oscar and Vipa were “unjustly enriched at the expense of” Edward and

to Edward’s detriment. Edward asserts that the unjust enrichment arose from the receipt

of profits, by way of excessive salaries, that Oscar and Vipa accepted and retained these

benefits, and that it is inequitable for them to retain the benefit without paying the value.

Edward seeks compensatory damages in an amount exceeding $75,000, to be determined

at trial.

To understand how I parse out the specific allegations in the complaint that

overcome the motion to dismiss, it is useful to set forth the statutory framework that applies

here.

12

II

A. Applicable Statutory Framework Under the Maryland General Corporation

Law

Under Maryland law, a corporation, large or small, is a creature of statute. A

corporation’s articles of incorporation or charter, issued by the State, is both a “contract

between stockholders” and “between the corporation and the State.” Warren v. Fitzgerald,

189 Md. 476, 485 (1948). The charter “is the foundational document of the company.”

Impac Mortg. Holdings, Inc. v. Timm, 474 Md. 495, 503 (2021) (citing CA §§ 2-102, 2-

104). The charter specifies the types and quantity of stock the corporation may issue and

defines the rights and priorities of the stockholders of the various types of stock. Id. at

503–04 (citing CA §§ 2-104, 2-105). It must include “a description of each class [of stock]

including any preferences, conversion and other rights, voting powers, restrictions,

limitations as to dividends, qualifications, and terms and conditions of redemption.” Id. at

504 (citing CA § 2-104).

Under the MGCL, a corporation is managed by its directors.3 Section 2-401(a)

provides that “[a]ll business and affairs of a corporation, whether or not in the ordinary

3

Under Title 4 of the Corporations and Associations Article of the Maryland Code,

a corporation can elect to become a “close corporation” as defined by the provisions in that

Title. To make such an election, the corporate charter must state that it is a close

corporation. CA § 4-201. A “[c]lear reference to the fact that the corporation is a close

corporation shall appear prominently: (1) At the head of the charter document in which the

election to be a close corporation is made; (2) In each subsequent charter document of the

corporation; and (3) On each certificate representing outstanding stock of the corporation.”

CA § 4-202. A close corporation is initially required to have “at least one director until an

election by the corporation in its charter to have no board of directors becomes effective.”

CA § 4-301. Stockholders of a close corporation may elect to have no directors. If that

occurs, the “stockholders may exercise all powers of directors, and the business and affairs

13

course, shall be managed by or under the direction of a board of directors.”

Section 2-401(b) states that “[a]ll powers of the corporation may be exercised by or under

authority of the board of directors except as conferred on or reserved to the stockholders

by law or by the charter or bylaws of the corporation.” In the exercise of their duties, the

MGCL establishes a statutory standard of conduct, which is set forth in CA § 2-405.1.

Given some legislative amendments to the standard of conduct—which this Court has yet

to consider, and which affect how I would analyze Counts I and II—I find it instructive to

explain some statutory and legislative history that led to its current iteration.

1. The Directors’ Statutory Standard of Conduct, or “the Business Judgment

Rule”

In 1976, the General Assembly enacted a statutory provision establishing a

director’s standard of conduct for corporate acts. CA § 2-405.1. 1976 Md. Laws Ch. 567.

The standard of conduct, which remains the same today, states that:

A director of a corporation shall act:

(1) In good faith;

(2) In a manner the director reasonably believes to be in the best interests of

the corporation; and

(3) With the care that an ordinarily prudent person in a like position would

use under similar circumstances.

of the corporation shall be managed under their direction[.]” CA § 4-303(1). “Under a

unanimous stockholders’ agreement, the stockholders of a close corporation may regulate

any aspect of the affairs of the corporation or the relations of the stockholders, including: .

. . (7) The payment of dividends or the division of profits.” CA § 4-401. Notably, Eastland

is not a close corporation, but a corporation organized under the MGCL.

14

CA § 2-405.1(c). Importantly, “[a] director who acts in accordance with the standard of

conduct provided in this section shall have the immunity from liability described under

§ 5-417 of the Courts and Judicial Proceedings Article,” CA § 2-405.1(e) (emphasis

added), and this section creates a statutory presumption that “[a]n act of a director of a

corporation is presumed to satisfy the standards set forth in subjection (c)[.]”

CA § 2-405.1(g). This standard of conduct, commonly referred to as the “business

judgment rule,” mirrored the director standard of conduct that was adopted by the

American Bar Association’s Model Business Corporation Act 8.30(a) in effect at that time.

James J. Hanks, Jr., Maryland Corporation Law (2d Ed. 2020, 2022 Supp.) (“Hanks”)

§ 6.06B, 6-24. In codifying the standard for director conduct, the General Assembly

replaced the common law duties that had historically governed Maryland corporations.4

In 1999, the General Assembly adopted a statutory amendment adding new

subsections with the intent of protecting Maryland corporations from unwanted takeovers.

Bernard S. Sharfman, Understanding Maryland’s Business Judgment Rule, 8 Duquesne

Bus. L.J. 1, 26–27 (2006); Senate Jud. Proc. Comm. Floor Report for Senate Bill 169, at 1

(1999) (“Senate Bill 169 makes a number of changes to strengthen Maryland’s laws

relating to unsolicited takeovers of corporations and real estate investment trusts.”).

Relevant here is the amendment limiting enforcement of the statutorily prescribed

4

Notably, Hanks observes, § 2-405.1—and former § 8.30 of the Model Business

Corporations Act upon which it is based—omitted any reference to “fiduciary” duties

“because that term could be confused with the unique attributes and obligations of a

fiduciary imposed by the law of trusts, some of which are not appropriate for directors of

a corporation.” Hanks, § 6.06B, 6-26; see also Model Bus. Corp. Act, Section 8.30 (1996).

15

standards to the corporation or to stockholders suing on behalf of the corporation via a

derivative suit. 1999 Md. Laws Ch. 300 (S.B. 169). Specifically, the 1999 amendments

added subsection (g) to Section 2-405.1, which barred direct claims against directors for

violating the standard of conduct, stating:

Nothing in this section creates a duty of any director of a corporation

enforceable otherwise than by the corporation or in the right of the

corporation.

CA § 2-405.1(g) (1999). As I explain below, this subsection, which barred stockholders

from filing direct claims against directors for violating their standard of conduct, was in

effect until the General Assembly revised the statute and deleted subsection (g) in 2016.

a. Shenker v. Laureate Education, Inc.

In Shenker v. Laureate Education, Inc., 411 Md. 317 (2009), this Court was asked

to consider whether stockholders of a corporation that was purchased in a cash-out merger

could bring a breach of fiduciary duty action against directors and investors. This case

arose while the above-described legislative amendments were in effect, barring direct

actions against directors. Id. at 326, 332; CA § 2-405.1(g) (1999). In other words, because

claims against directors for violating the directors’ standard of conduct were limited to

derivative claims, the cashed-out stockholders no longer had a right of action under the

statute as they were no longer stockholders with rights to bring derivative suits on behalf

of the corporation. Accordingly, the circuit court granted the defendants’ motion to dismiss

the action, and the Appellate Court of Maryland affirmed. Shenker, 411 Md. at 332–33.

This Court granted certiorari to determine, in relevant part, whether

Section § 2-405.1 barred direct claims against directors for breach of fiduciary duty. Id. at

16

333. This Court held that “in the context of a cash-out merger transaction, where the

decision to sell the corporation already has been made, corporate directors owe their

shareholders common law duties of candor and good faith efforts to maximize shareholder

value, and that allegations of breach of those duties may be pursued through a direct suit

by shareholders.” Id. at 335–36 (emphasis added). Although the holding in Shenker was

intended to apply narrowly by limiting it to “the context of a cash-out merger transaction,

where the decision to sell the corporation already has been made[,]” questions arose in the

legal community “as to what other common law fiduciary duties might exist[.]” Bill

Carson & Scott Wilson, The Director Duties Bill: Amendments to Section 2-405.1 of the

Maryland General Corporation Law, 49-OCT Md. B.J. 40, 41 (2016).5 Members of

Maryland’s business law community expressed concern that “Shenker and its progeny

introduced deep uncertainty into the business world in which Maryland corporations and

their boards of directors reside.” Id. at 41.

b. Post-Shenker Legislative Amendments Clarifying that Section 2-405.1 is the

Sole Source of Duties Owed by a Director to a Corporation or its

Stockholders

In 2015, the General Assembly introduced a bill to clarify the liability and duties of

directors post-Shenker. 2015 S.B. 459. Bill sponsor Senator Brian Feldman, accompanied

by members of the Maryland Bar Association Business Law Section, testified before the

5

As an example of this confusion, Messrs. Carson and Wilson point to Sutton v.

FedFirst Fin. Corp., 226 Md. App. 46 (2015), in which the Appellate Court, “in the

absence of any standard [] purported to adopt Delaware corporate law.” Bill Carson &

Scott Wilson, The Director Duties Bill: Amendments to Section 2-405.1 of the Maryland

General Corporation Law, 49-OCT Md. B.J. 40, 41 (2016).

17

Senate Judicial Proceedings Committee to explain the bill. Jud. Proc. Comm. Hearing

(Mar. 18, 2015). Senator Feldman explained that the Shenker decision prompted the need

to clarify that CA § 2-405.1 is intended to be the sole source of the directors’ duties. Jud.

Proc. Comm. Hearing (Mar. 18, 2015). The bill, which was introduced late in the

legislative session, ultimately passed unanimously in the House but was not voted on in

the Senate.

In the 2016 legislative session, an identical bill was introduced. 2016 S.B. 148. At

the committee hearing, bill sponsor Senator Feldman and representatives from the

Maryland Bar Association Business Law Section reiterated the history behind the bill and

the need for the General Assembly to clarify the scope of the statutory standard in

CA § 2-405.1 and to disavow the “problematic dicta” in Shenker. Jud. Proc. Comm.

Hearing (Jan. 27, 2016). The bill passed unanimously and was approved by the Governor

on April 26, 2016. It went into effect on October 1, 2016.

I highlight two significant changes that were made to Section 2-405.1 during the

2016 Legislative Session. First, the General Assembly added subsection (i), which states

that Section 2-405.1:

1. Is the sole source of duties of a director to the corporation or the stockholders

of the corporation, whether or not a decision has been made to enter into an

acquisition or potential acquisition of control of the corporation or enter into

any other transaction involving the corporation; and

2. Applies to any act of a director, including an act as a member of a committee

of the board of directors.

(Emphasis added). The plain and unambiguous language added to Section 2-405.1(i)

makes it clear that the statutory standard of conduct is the “sole source” of director duties.

18

To put it differently, there are no fiduciary duties owed by a director of a Maryland

corporation to the corporation or its stockholders other than the duties arising under the

standard of conduct set forth in Section 2-405.1. Second, the General Assembly deleted

former subsection (g)—the subsection added in 1999 to eliminate direct claims by

stockholders against directors.

My plain language interpretation is a view shared by others. See Carson & Wilson,

supra at 42 (stating “[w]e believe that elimination of former subsection (g) makes clear

that it is the legislative intent that the standard of conduct run directly to the stockholders

of a Maryland corporation under limited circumstances and that the stockholders have a

direct remedy for any breach of the standard of conduct in such circumstances[]”); Hanks,

§ 6.06B, 6-46 (stating that the result of the 2016 legislative amendment deleting

Section 2-405.1(g) “is that a stockholder’s right to sue a director directly or derivatively

for failure to comply with the statutory standard of conduct will be determined under

applicable case law, which distinguishes between injury to the corporation (derivative

claim available) and injury to the stockholder (derivative claim not available) as was the

case prior to the addition of Section 2-405.1(g) in 1999”).

The plain text and statutory history of the 2016 amendments to Section 2-405.1

clearly reflect that the business judgment rule applies to direct stockholder claims. Because

this Court has not had an opportunity to consider these legislative changes to

Section 2-405.1,6 this case is an opportunity for this Court to confirm the proper

6

In Oliveira v. Sugarman, 451 Md. 208, 220 (2017)—filed three months after the

amendments went into effect—this Court reviewed the question of whether the

19

interpretation of the current version of this statute. In Part III, I explain how I apply these

legislative amendments to Edward’s claims in this case.

Having addressed my view of the proper scope and application of the directors’

standard of conduct, I turn next to some of the statutory rights and duties conferred upon

directors, which—as the statute prescribes—must be viewed through the lens of the

application of the business judgment rule.

2. Directors’ Authority to Declare Distributions

Notably, the directors have the right, not the duty, to declare a distribution,

CA §§ 2-301(a), 2-309(b), including a “declaration or payment of a dividend[] . . . [,]” CA

§ 2-301(b)(1).7 Under the MGCL, and subject to the terms of the corporate charter,

petitioner/stockholders’ claims were direct stockholder claims “not subject to the business

judgment rule.” In that case, this Court did not reach the question of whether the business

judgment rule applied to direct actions because the Court concluded that the claims were

improperly brought as direct actions rather than derivative actions. Id. at 246. However,

this Court appeared to assume that the business judgment rule did not apply to direct

claims. See id. at 222-23 (“To seek judicial review of a board’s business decision under

the business judgment rule, shareholders must file a derivative suit on behalf of the

corporation.”).

In my view, in its opinion below, the Appellate Court made a similar misstatement

concerning the application of the directors’ standard of conduct when the court stated that

the business judgment rule does not apply in direct actions. Mekhaya v. Eastland Food

Corp., 256 Md. App. 497, 529 (2022) (quoting Shenker, 411 Md. at 345, for the proposition

that, where a stockholder can establish a right to bring a direct action by demonstrating the

duty breached was owed to the stockholder and that he or she can prevail without showing

an injury to the corporation, “the business judgment rule does not apply[]”); also citing to

Oliveira, 451 Md. at 230–31.

7

The MGCL does not define the word “dividend.” It does, however, define

“distribution.” CA § 2-301 states:

(a)(1) In this subtitle, “distribution” means:

20

directors may authorize a distribution if, after the distribution, the corporation would not

be insolvent, either by being unable to pay debts as they come due in the usual course of

business, or by its assets being less than the sum of its liabilities plus senior liquidation

preferences. CA §§ 2-309, 2-311. A Maryland corporation may make a distribution from

its net earnings in the current or preceding fiscal year, or from the sum of net earnings from

the preceding eight fiscal quarters. Id. at § 2-311(a)(2). Regardless of the basis for the

distribution, the decision is entrusted solely to the directors of the corporation. The

Maryland corporation statute specifically states that “[i]f authorized by its board of

directors, a corporation may make distributions to its stockholders, subject to any

restriction in its charter and the limitations in § 2-311 of this subtitle.” CA § 2-309(b).

Similarly, a corporation may distribute its capital surplus only “[b]y resolution of its board

of directors[.]” Id. at § 2-304(a). Ultimate authority, at all times, rests with the directors,

although the board may delegate to an executive committee and other committees its

powers related to distributions, id. at § 2-411(a), and may delegate to a corporate officer

(i) A direct or indirect transfer of money or other property of the

corporation in respect of any of its shares; or

(ii) An incurrence or forgiveness of indebtedness by a corporation

to or for the benefit of the corporation’s stockholders in respect

of any of its shares.

(2) “Distribution” does not include a stock dividend or stock split

authorized in accordance with § 2-309(c) of this subtitle.

(b) A distribution may be in the form of:

(1) A declaration or payment of a dividend;

(2) A purchase, redemption, whether or not at the option of the

corporation or the stockholders, or other acquisition of shares; or

(3) An issuance of evidence of indebtedness.

21

the power to fix the amount and other terms of the distribution, id. § 2-309(d). The MGCL,

which confers statutory authority on the directors to make distributions8 in the absence of

an agreement to the contrary, is consistent with general corporate principles. See 11

Fletcher Cyclopedia of the Law of Corporations. § 5349 (September 2022 update) (“Unless

otherwise provided by agreement, the authority to declare dividends . . . is solely vested in

the board of directors . . . .” (footnote omitted)).

Not only is the board of directors authorized to make distributions under

CA § 2-309, but directors have a concomitant personal liability where a director votes for,

or assents to, a distribution that violates CA § 2-311. Such actions are not shielded by the

business judgment rule. See CA § 2-312(a) (stating that “[i]f it is established that the

director’s duties were not performed in compliance with § 2-405.1 of this title, a director

who votes for or assents to a distribution made in violation of the charter or § 2-311 of this

subtitle is personally liable to the corporation for the amount of the distribution that exceeds

what could have been made without violating the charter or §2-311[.]”).

3. Stockholders’ Authority

The stockholders “of a corporation are its owners, but not its managers.” Mona v.

Mona Elec. Group, Inc., 176 Md. App. 672 (2007) (citing Werbowsky v. Collomb, 362 Md.

581, 599 (2001) (“Except to the extent that a transaction or decision must, by law or by

virtue of the corporate charter, be approved by the [stockholders], the directors, either

8

By contrast, as discussed supra, n.3, where a corporation has elected to become a

close corporation, the stockholders may regulate any aspect of the affairs of the

corporation, including “[t]he payment of dividends or the division of profits.” CA § 4-

401(a)(7).

22

directly or through the officers they appoint, exercise the powers of the corporation.”); also

citing CA § 2-401). As far as management responsibilities, unless modified by agreement,

the MGCL limits the stockholders’ management role in the corporation to the election of

the directors. CA § 2-404(b). With certain exceptions, “[t]he stockholders of a corporation

may remove any director, with or without cause, by the affirmative vote of a majority of

all of the votes entitled to be cast generally for the election of directors[.]” Id. at § 2-406(a).

One such limitation on the stockholders’ ability to remove a director for cause is if the

charter provides otherwise. Id. at § 2-406(a)(2). The officers of the corporation, in turn,

are elected by the directors. CA § 2-413.

4. A Summary of Some Key Provisions of the MGCL Related to Corporate

Management

I summarize some of the key provisions of the MGCL pertaining to corporate

management that govern my review of the four corners of the Amended Complaint. First,

the MGCL applies to corporations formed under its provisions, whether small or large.

Under the MGCL, the “business and affairs of the corporation . . . shall be managed under

the direction of a board of directors.” CA § 2-401(a) (emphasis added). Additionally,

“[a]ll powers of the corporation may be exercised by or under authority of the board of

directors except as conferred on or reserved to the stockholders by law or by charter or

bylaws of the corporation.” Id. at § 2-401(b). Such management decisions include: (1) the

decision to authorize distributions, see CA § 2-309(b); (2) the right to appoint and remove

officers, see CA § 2-413, (3) the right to appoint an executive committee composed of one

23

or more directors, and to delegate to those committees any powers of the board, subject to

statutory limitations, see CA § 2-411(a).

Maryland’s business judgment rule has been codified in CA § 2-405.1(c), which

provides that a director shall act: (1) in good faith; (2) in a manner the director reasonably

believes to be in the best interests of the corporation; and (3) with the care that an ordinarily

prudent person in a like position would use under similar circumstances. Section

2-405.1(g) states that “[a]n act of a director of a corporation is presumed to be in

accordance with subsection (c).” Once a challenger “presents evidence adequate to rebut

the presumption, the burden of production shifts back to the corporation or the directors,

as the case may be, to present evidence that the directors acted in accordance with

Section 2-405.1.” Hanks, § 6.09, 6-75.

5. Stockholder’s Remedies Under CA § 3-413

Another provision of the MGCL permits a minority stockholder to seek equitable

relief in the form of involuntary dissolution where a stockholder can establish that “[t]he

acts of the directors or those in control of the corporation are illegal, oppressive, or

fraudulent.” Specifically, and subject to an exception not relevant here, CA § 3-413(b)

provides as follows:

[A]ny stockholder entitled to vote in the election of directors of a corporation

may petition a court of equity to dissolve the corporation on grounds that:

(1) The stockholders are so divided that they have failed, for a period

which includes at least two consecutive annual meeting dates, to elect

successor to directors whose terms would have expired on the election

and qualification of their successors; or

24

(2) The acts of the directors or those in control of the corporation are

illegal, oppressive, or fraudulent.

As I will discuss more fully below, in Bontempo v. Lare, 444 Md. 344 (2015), this

Court adopted the holding of Edenbaum v. Schwarcz-Osztreicherne, 165 Md. App. 233

(2005), that, when a minority stockholder has established that “directors or those in

control” have engaged in oppressive conduct, a court may grant equitable relief short of

dissolution. Given that Edward, in his Amended Complaint, seeks equitable relief as

described in those cases, it is instructive to discuss them in some detail.

a. Edenbaum v. Schwarcz-Osztreicherne

Edenbaum involved a closely-held corporation that operated an adult care facility.

165 Md. App. at 233. The corporation was owned by two stockholders—the majority

stockholder owning a 51% interest and the minority stockholder owning a 49% interest.

Id. at 239. The parties entered into a written stockholders’ agreement, which stated that

“the corporate charter and by-laws shall be amended, and are hereby deemed to be

amended, to reflect the provisions of the Shareholder’s Agreement.” Id. The majority

stockholder, an experienced manager of assisted living facilities, was the person in charge

of admissions, hiring, billing, and administration of the facility. Id. at 239–40. The

minority stockholder was a geriatric nurse who provided patient care and house

maintenance at the facility. Id. at 238, 240. The parties did not execute a separate

employment agreement, but the stockholders’ agreement contained specific details about

their respective job titles, responsibilities, and salaries. Id. at 238–40. Specifically, under

the agreement, the majority stockholder had the authority to make all business decisions

25

for the corporation. Id. at 239–40. After he became dissatisfied with the minority

stockholder’s operation of the facility, he terminated her employment. Id. at 241. The

minority stockholder then sued the majority stockholder and the corporation for breach of

contract, and also sought dissolution of the corporation under CA § 3-413, on the basis of

“illegal, oppressive and/or fraudulent” conduct by the majority stockholder. Id.

The corporation and majority stockholder contended that, insofar as the

stockholders’ agreement spelled out the job descriptions, salaries, and work duties of the

stockholders as employees of the facility, it functioned as an employment agreement—an

argument that the Appellate Court accepted while also noting that the agreement was “more

modest in scope” as to their rights as stockholders. Id. at 248. The trial court found that

the minority stockholder was properly discharged under that agreement. Id. at 250.

Because the minority stockholder had not appealed that ruling, the Appellate Court had no

occasion to discuss whether she was an at-will employee. Id. at 250–51. But the Appellate

Court reversed the circuit court’s decision that the minority stockholder was entitled to

employment-related relief—i.e., salary—as opposed to profits owing to the owners of the

corporation. Id. at 250–51.

In her cross-appeal, the minority stockholder contended that the circuit court abused

its discretion in dismissing her request for involuntary dissolution of the corporation. Id.

at 254. She argued that the court should have granted that request on the ground that the

majority stockholder “engaged in oppressive conduct because his conduct substantially

defeated her reasonable expectations as” a stockholder. Id. (internal quotations omitted).

26

The Appellate Court reviewed the provisions of CA § 3-413(b)(2), which permits a

court to dissolve a corporation on the ground that the “acts of the directors or those in control

of the corporation are illegal, oppressive, or fraudulent.” Id. at 254–55. Observing that

“oppressive” conduct is not defined by the statute, the court “surmise[d] that it does not

necessarily involve ‘fraudulent’ or ‘illegal’ conduct.” Id. at 255. The Appellate Court looked

to other states, as well as commentators, for an apt definition of “oppressive conduct” in this

context. Id. at 255–56. The court noted that Hanks defined the term as “conduct that

substantially defeats the reasonable expectations of a stockholder.” Id. at 256 (citing Hanks

§ 11.7(b)). “Or, in the more precise terminology of one of our sister states, ‘conduct that

substantially defeats the ‘reasonable expectations’ held by minority [stockholders] in

committing their capital to the particular enterprise.’” Id. at 256 (citing Matter of Kemp &

Beatley, Inc., 64 N.Y.2d 63, 484 N.Y.S.2d 799, 473 N.E.2d 1173, 1179 (1984)).

The court observed that the “so-called ‘reasonable expectations’ view has been

adopted, either as the sole test of oppressive conduct or as one such test, by a number of

other state courts.” Id. (citations omitted). The Appellate Court noted that “the typical

characteristics of a closely held corporation are: (1) a small number of stockholders; (2) no

ready market for the corporate stock; and (3) substantial majority stockholder participation

in the management, direction and operations of the corporation.” Id. at 257 (citations

omitted).

The Appellate Court stated that

the very nature of a closely held corporation makes it possible for a majority

[stockholder] to ‘freeze out’ a minority [stockholder], that is, deprive a

minority [stockholder] of her interest in the business or a fair return on her

27

investment. The limited market for stock in a closely held corporation and

the natural reluctance of potential investors to purchase a noncontrolling

interest in a closely held corporation that has been marked by dissension can

result in a minority [stockholder’s] interest being held ‘hostage’ by the

controlling interest, and can lead to situations where the majority ‘freeze out’

minority [stockholders] by the use of oppressive tactics.

Id. at 257–58 (citations omitted) (cleaned up). The Appellate Court explained that, because

of the “predicament” in which a minority stockholder is left when a “freeze out occurs,”

courts in other jurisdictions have looked at the majority stockholder’s “alleged ‘oppressive’

conduct, in terms of the ‘reasonable expectations’ held by minority [stockholders] in

committing their capital to the particular enterprise.” Id. at 258. (citing Kemp & Beatley,

473 N.E.2d at 1179–80). The Appellate Court summarized the “reasonable expectations”

view of oppressive conduct from other states that have adopted the doctrine as recognizing

that a minority [stockholder] who reasonably expects that ownership in the

corporation would entitle him to a job, a share of the corporate earnings, and

a place in corporate management would be oppressed in a very real sense

when the majority seeks to defeat those expectations and there exists no

effective means of salvaging the investment. But, we caution, oppression

should be deemed to arise only when the majority conduct substantially

defeats expectations that, objectively viewed, were both reasonable under the

circumstances and were central to the petitioner’s decision to join the

venture. It should not be deemed oppressive simply because the petitioner’s

subjective hopes and desires in joining the venture are not fulfilled. That is

to say, disappointment alone should not necessarily be equated with

oppression.

Id. at 258 (cleaned up).

Although the Appellate Court held that the minority stockholder was not entitled to

employment-related relief as a stockholder, the court held that she had been oppressed by

the majority stockholder when her termination “defeated her reasonable expectations that

she would be employed by the corporation, receive a salary, and take part in its

28

management.” Id. at 259. The court remanded the case to the circuit court to consider

other possible equitable remedies. Id. at 261. Thus, the court looked to her expectation of

employment with the company (together with her expected role in management) as a gauge

for measuring oppression, even though it held that she was not entitled to employment-

related relief in the form of post-termination salary.

The Appellate Court noted that, although CA § 3-413 only mentions “dissolution as

a remedy for oppressive conduct,” the court stated that it was joining other courts “which

have interpreted their similar statutory counterparts to allow alternative equitable remedies

not specifically stated in the statute.” Id. at 260 (quotations omitted). The Appellate Court

listed a non-exhaustive set of alternatives to dissolution that might be appropriate in a

particular case:

(a) The entry of an order requiring dissolution of the corporation at a specified

future date, to become effective only in the event that the stockholders fail to

resolve their differences prior to that date;

(b) The appointment of a receiver, not for the purposes of dissolution, but to

continue the operation of the corporation for the benefit of all the

stockholders, both majority and minority, until differences are resolved or

“oppressive” conduct ceases;

(c) The appointment of a “special fiscal agent” to report to the court relating to

the continued operation of the corporation, as a protection to its minority

stockholders, and the retention of jurisdiction of the case by the court for that

purpose;

(d) The retention of jurisdiction of the case by the court for the protection of the

minority stockholders without appointment of a receiver or “special fiscal

agent”;

(e) The ordering of an accounting by the majority in control of the corporation

for funds alleged to have been misappropriated;

29

(f) The issuance of an injunction to prohibit continuing acts of “oppressive”

conduct and which may include the reduction of salaries or bonus payments

found to be unjustified or excessive;

(g) The ordering of affirmative relief by the required declaration of a dividend

or a reduction and distribution of capital;

(h) The ordering of affirmative relief by the entry of an order requiring the

corporation or a majority of its stockholders to purchase the stock of the

minority stockholders at a price to be determined according to a specified

formula or at a price determined by the court to be a fair and reasonable price;

(i) The ordering of affirmative relief by the entry of an order permitting minority

stockholders to purchase additional stock under conditions specified by the

court;

(j) An award of damages to minority stockholders as compensation for any

injury suffered by them as the result of “oppressive” conduct by the majority

in control of the corporation.

Id. at 260–61 (quoting Baker v. Commercial Body Builders, Inc., 507 P.2d 387, 395–96

(Or. 1973)). The Appellate Court remanded the case to the circuit court to consider other

possible remedies. Id. at 261.

b. Bontempo v. Lare

In Bontempo, this Court considered, among other things, the limit of equitable tools

available to minority stockholders to remedy stockholder oppression. 444 Md. at 344. The

case involved a minority stockholder and employee of a corporation and a husband and

wife who, together, were majority stockholders of the corporation. Id. at 349. The minority

stockholder assented to the terms of a stockholder agreement and an amended and restated

stockholder agreement that acknowledged his 45% ownership in the company and

designated triggering events that would require a stockholder to sell the stockholder’s

30

interest, including termination of the stockholder’s employment with the corporation “for

good cause.” Id. at 350–51.

The minority stockholder worked with the husband to grow the business, but, over

time, their relationship deteriorated. Id. at 352–54. The minority stockholder and the

husband disagreed about business strategy, salaries, stockholder distributions, and the

minority stockholder’s job performance. Id. at 353–54. After they failed to reach an

agreement to split the corporation, the husband proposed a separation agreement, which

the minority stockholder declined to consider and refused to sell his shares. Id. at 354. In

response, the husband fired him. Id. The minority stockholder was no longer an employee

of the corporation, but he remained an officer, director, and stockholder of the corporation.

Id. at 355. Eventually, the minority stockholder resigned from his director position but

retained his 45% ownership of stock. Id.

The minority stockholder filed an action in the circuit court including five counts.

Id. Relevant here is the minority stockholder’s direct claim against the majority

stockholders under CA § 3-413 “seeking a panoply of equitable relief for [the minority

stockholder] under that statute based on his status as a [stockholder] of [the corporation]

and the alleged ‘illegal, fraudulent, and oppressive’ conduct of the [majority stockholders]

with respect to him.” Id. at 356. As part of these remedies, the minority stockholder sought

reinstatement of his status as an employee, “or to award other employment related relief.”

Id. at 349. The circuit court reviewed the minority stockholder’s direct claim under

CA § 3-413 and applied the “reasonable expectations” test as articulated in Edenbaum. Id.

at 357. The circuit court found that the minority stockholder’s reasonable expectations had

31

been defeated, and, in fashioning relief, determined an equitable remedy short of

dissolution under § 3-413. Id. at 357–58. The circuit court found that the stockholder was

an at-will employee, and in fashioning a lesser remedy, “decided not to require

employment-related relief without an oral or written agreement to support that relief[.]”

Id. at 374.

On appeal, the Appellate Court affirmed the circuit court with respect to the

minority stockholder’s CA § 3-413 claim. Id. at 361–62. The parties then cross-petitioned

this Court for a writ of certiorari. Id. at 362. This Court granted certiorari, and, in

affirming the circuit court, adopted the “reasonable expectations” test for measuring

minority stockholder oppression, and held that “a court of equity may employ other

equitable tools, short of dissolution, to remedy [stockholder] oppression.” Id. at 348. After

extensively describing the Appellate Court’s analysis in Edenbaum, we cited with approval

the “non-exhaustive set of alternatives to dissolution that might be appropriate in a

particular case[.]” Id. at 368. We explained that:

A court acting under CA § 3–413 to fashion a remedy less drastic than

dissolution is not required to match its remedy to an expectation of the

minority shareholder. (Indeed, the default remedy—dissolution—may bear

no correlation to any expectation of a shareholder.) In particular, a court

should take into account not only the reasonable expectations of the

oppressed minority shareholder, but also the expectations and interests of

others associated with the company. Inherent in the notion that a court of

equity may devise a remedy other than the statutory remedy invoked by the

minority shareholder is that there are other interests at stake besides those of

the oppressed or disaffected shareholder. The existence and operation of the

corporation—an entity that is legally distinct from any of its owners—affects

not only the complaining and controlling shareholders, but also many others

who may be associated with or depend on the company—other shareholders,

its management, employees, and customers. Dissolution—capital

punishment for the corporation—affects those parties as well.

32

Id. at 370. We explained that “‘[a] reasonable expectation’ for purposes of the corporate

dissolution statute is simply a way of detecting oppression, but it does not dictate the relief

that an equity court is to grant.” Id. at 371. We stated that while the minority stockholder

“may have had a reasonable expectation of a future relationship” with the corporation “as an

employee, officer, director, and shareholder, that is a far cry from an employment agreement

that entitles him to specific employment-related relief—i.e., a specific position within the

company with specific duties, pay, and conditions of employment.” Id. For example, we

observed, “[o]ne might envision a situation in which a minority shareholder reasonably

believed, upon committing capital to an entity, that one day he would advance to an executive

position with the enterprise and in which, as a result of oppressive conduct of the majority

shareholder, the minority shareholder has never been considered for any management

position.” Id. at 371–72. We stated that “[a] court acting under the authority of the corporate

dissolution statute would be venturing far afield to order the company to hire the shareholder

into a particular position with particular duties at a specified salary.” Id. at 372.

Analyzing the facts of this case, we determined that the circuit court did not abuse

its discretion in finding that the minority stockholder was not “entitled to employment-

related relief—whether reinstatement or the monetary damages he is primarily interested

in[,]” as those remedies “would [] convert a discretionary equitable remedy into a

substantive legal right.” Id. at 374.

In summary, we held

that the measuring stick for ‘oppression’ of a minority shareholder—the

shareholder’s ‘reasonable expectations’ upon becoming an owner of the

33

company—does not dictate the nature of equitable relief (short of corporate

dissolution) that a trial court must impose. In fashioning relief, the trial court

may properly take account of the viability of the corporation, and the impact

of the relief on others associated with the corporation, including other

shareholders, management, employees, and customers. Employment-related

relief, such as pay-related monetary damages or a requirement that the

corporation employ the minority shareholder, is unlikely to be appropriate in

the absence of a written or oral employment agreement.

Id. at 349. Reviewing the circuit court’s ruling in the context of the particular facts of the

case, we held that the trial court in this case did not abuse its discretion in deciding on

appropriate relief. Id. at 378.

B. A Word About Direct Stockholder Claims Versus Stockholder

Derivative Claims

When a stockholder brings a claim against a Maryland corporation, it is necessary

to determine whether the suit is a derivative suit or a direct action. “A derivative suit is an

action by a stockholder that derives from the right to enforce a legal right of the corporation

against another person. The suit is brought in the name and right of the corporation.”

Hanks, § 7.22A, 7-65. This is because the corporation is the real party in interest, and the

substantive claims belong to the corporation. Werbowsky, 362 Md. at 599 (citations

omitted). Maryland courts distinguish between direct and derivative claims brought by

stockholders by looking at (1) the nature of the wrong alleged, and (2) the relief that the

plaintiff would receive if successful. Oliveira, 451 Md. at 230.

A stockholder “may bring a direct action against the corporation, its officers,

directors, and other [stockholders] to enforce a right that is personal to him.” Mona, 176

Md. App. at 697. Direct claims require a plaintiff to have suffered a “distinct injury”

separate from any harm suffered by the corporation, not that the stockholder has suffered

34

an injury distinct from other stockholders. Oliveira, at 231, 242. This Court has stated that

“[t]he remedy that a [stockholder] seeks must benefit the [stockholder] as an individual,

not the corporate entity.” Id. at 231.

Derivative claims, on the other hand, involve a corporate right brought on behalf of

the corporate entity, rather than the stockholder, with any recovery belonging to the

corporate entity, not the plaintiff stockholder. See id. at 223; Boland v. Boland, 423 Md.

296, 328 (2011). Derivative actions have been described as “an extraordinary equitable

device to enable shareholders to enforce a corporate right that the corporation failed to

assert on its own behalf.” Werbowsky, 362 Md. at 599. Because derivative claims require

that the corporation refused to assert its own right, plaintiffs are required to “seek a

corporate decision on whether to maintain a lawsuit, a prerequisite known as the ‘demand

requirement.’” Boland, 423 Md. at 330. That is, a stockholder must “allege and prove that

he requested the directors to institute suit in the name of the corporation, and they refused.”

Waller v. Waller, 187 Md. 185, 192 (1946).

Where a harm is suffered by both the stockholders and the corporation alike, a

stockholder derivative claim is the appropriate action. Oliveira, 451 Md. at 240.

III

Against the framework of the applicable law, I turn to the allegations set forth in the

Amended Complaint. First, it is important to note that Edward has not filed this claim as

a derivative action, but as a direct one in his capacity as a minority stockholder. The

Amended Complaint has not been filed on Eastland’s behalf. Indeed, Eastland is a

defendant, not a plaintiff. Nor has Edward alleged that he requested the directors to initiate

35

suit in the name of Eastland, and they refused. Accordingly, we must consider whether the

various counts pleaded by Edward state direct claims that he is entitled to make in his

capacity as a minority stockholder.

Edward has filed this action in his capacity as a minority stockholder against several

defendants—Eastland; Oscar, and Vipa, “as stockholders, directors and officers” of

Eastland; and Tisnai, as a director of Eastland. Edward has pleaded certain facts in the

Amended Complaint that are common to all counts. Counts I and II are statutory claims

and Count III arises under common law. Count I, titled “Oppression of a Minority

Stockholder[,]” has been filed against all of the Defendants. Count II, titled “Breach of

Fiduciary Duties[,]” has been filed against Oscar, Vipa, and Tisnai “as directors of”

Eastland, and also against Oscar and Vipa “as majority stockholders.” Count III, titled

“Unjust Enrichment” has been filed against Oscar and Vipa.

A. Edward Has Failed to State a Claim for Unjust Enrichment

Taking the counts out of order and starting with Count III, I agree with the Majority

that Edward has failed to state a claim for unjust enrichment. Maj. Slip Op. at 34–35.

Under Maryland law, a cause of action for unjust enrichment consists of three elements:

“(1) [a] benefit conferred upon the defendant by the plaintiff; (2) [a]n appreciation or

knowledge by the defendant of the benefit; and (3) [t]he acceptance or retention by the

defendant of a benefit under such circumstances as to make it inequitable for the defendant

to retain the benefit without the payment of its value.” Berry & Gould, P.A. v. Berry, 360

Md. 142, 151 (2000) (citations omitted). As the Majority correctly notes, damages in an

unjust enrichment action are measured by the gain to the defendant and not by the loss to

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the plaintiff. Maj. Slip Op. at 34. Edward did not confer any benefit upon Vipa and Oscar

in the form of excessive salaries or compensation. Any such claim would lie in Eastland,

and Edward has not filed a derivative claim on behalf of Eastland.

B. Edward Has Pleaded Sufficient Facts to Support Statutory Claims Arising

Under the MGCL

Edward has alleged two statutory counts that arise under the MGCL—Count I, a

claim arising under CA § 3-413(b)(2), which permits a stockholder to petition for

involuntary dissolution under certain circumstances including where “[t]he acts of the

directors or those in control of the corporation are illegal, oppressive, or fraudulent[;]” and

Count II, a claim against Eastland’s directors arising under CA § 2-405.1(c) alleging a

violation of the directors’ statutory standard of conduct. As I describe below, I believe that

Edward’s complaint alleges sufficient facts to assert a statutory claim under

CA § 3-413(b)(2) and CA § 2-405.1(c), although he has not sought an available form of

damages to proceed under the latter. Below, I discuss the facts set forth in the complaint

that I find are sufficient to support the statutory claims.

First, as noted above, Edward has not filed a derivative claim. The allegations that

relate to the harm allegedly suffered by Eastland—such as the general corporate harm

allegedly suffered by the decision to pay “excessively high salary and other compensation

to [Oscar and Vipa]”—are claims that may only be brought on behalf of Eastland and,

therefore, should not be considered.

In light of the fact that this case is the first instance in which this Court has

considered the effect of the 2016 legislative amendments to the directors’ statutory

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standard of conduct, which now provides a stockholder with a right to bring a direct claim

against corporate directors for violating the business judgment rule, I explain how such a

claim should be analyzed.

1. Count II—Statutory Claim for a Violation of the Directors’ Standard of Conduct

In Plank v. Cherneski, 469 Md. 548 (2020), this Court held that a breach of fiduciary

duty may be actionable as an independent cause of action. 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.” Id. at 625. “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 specific breach in question, and may arise under a statute,

common law, or contract.” Id. We stated in Plank that a “court should consider the nature

of the fiduciary relationship and possible remedies afforded for a breach, on a case-by-case

basis.” Id. In so doing, 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 specific type of fiduciary relationship and the specific

breach alleged, 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.

Id. at 625–26.

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Applying this framework here, Edward has identified a statutory duty that

Eastland’s directors owe to him under CA § 2-405.1.9 Specifically, the directors owe

Edward a duty to act: (1) in good faith; (2) in a manner the director reasonably believes to

be in the best interests of the corporation;10 and (3) with the care that an ordinarily prudent

person in a like position would use under the circumstances.

Edward has overcome the presumption of the business judgment rule by setting

forth sufficient facts, which, if proven, would demonstrate Eastland’s historical practice of

paying corporate profits to stockholder/employees in the form of bonuses as opposed to

dividends. The Amended Complaint sets forth Edward’s annual compensation for the

years 2006 through 2018, which reflects considerable increases in 2008 and 2015—the

years that corresponded with Edward becoming a stockholder, as well as his increase in

stock ownership. Edward alleges, in specific amounts, sums that he contends were paid as

9

Although Edward alleges in Count II that Oscar and Vipa, in their capacity as

majority stockholders, owe him “fiduciary duties,” which he contends they breached, he

has not identified any specific fiduciary duties that arise by virtue of their status as

stockholders. The duties identified by Edward in Count II all relate to directors’ duties that

the MGCL vests within Eastland’s board of directors. Accordingly, for purpose of my

analysis, I consider only those statutory claims arising under CA § 2-405.1.

10

I realize that the standard of conduct requires that Edward prove that the directors’

actions were not in the best interest of the corporation. CA § 2-405.1. I observe, however,

that the 2016 amendments provided stockholders with a right to file a direct claim against

directors for a failure to comply with the statutory standard of conduct where the

stockholder can establish an injury that is personal to the stockholder (as opposed to an

injury suffered by the corporation in the form of a derivative claim). In light of this

amendment, I conclude that, one way a stockholder would be able to prove that the

directors were not acting in the best interest of the corporation would be to establish that

the directors were acting in a manner that does not benefit all stockholders equally, and,

instead, were acting in a manner that furthered their personal interest or benefit, which in

turn caused the stockholder to suffer a distinct injury.

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annual bonus payments in lieu of distributions of profits that would have been

commensurate with his stock ownership interest. He alleges that up until August 2017,

Pricha, as Eastland’s President and director, determined the amount that each stockholder

would receive as a bonus instead of a declared dividend or distribution.

Edward alleges that Eastland’s directors and stockholders, as well as its accountants

and attorneys, all had direct knowledge of Eastland’s longstanding practice of Eastland

paying its profits in the form of bonuses to its stockholders, instead of paying dividends.

To support this allegation, he quotes from an email that Eastland’s attorney sent to

Eastland’s stockholders ten days prior to the October 2018 annual stockholders’ and

regular directors’ meeting, which reflects that the agenda included discussion pertaining to

“introduction of a dividend study (advantages to moving to shareholders getting dividends

with respect to their ownership in lieu of salaries being paid as if they were dividends)[,]”

and also reflects that the corporate accountants would be present. Edward further alleges

that he attended the stockholders’ meeting accompanied by his counsel, and that there was

a discussion of the dividend study. During the time period in which he was still a director,

Edward alleges that he requested payroll data for all employees, including Oscar and Vipa,

along with any bonuses, special pay, and money transferred to either of them, and he was

advised that Oscar would not allow that information to be provided to him.

Edward alleges that, after he was removed from the Board and his employment was

terminated, Eastland did not consider the dividend study further and has since failed to pay

Edward a portion of Eastland’s profits despite his continued status as a stockholder. In my

view, Edward alleges with specificity a historical practice of paying Eastland’s profits to

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its stockholder/employee as bonus payments instead of stockholder distributions—a

practice that Edward alleges the directors have continued with respect Oscar and Vipa, but

not to him. In other words, Edward has alleged facts that, if proven, would demonstrate

that Oscar, Vipa, and Tisnai were not acting in good faith, were not acting in the best

interest of all of the stockholders, and stood to receive some personal benefit when they

continued to pay corporate profits only to stockholder/employees in the form of bonus

compensation instead of paying the corporate profits to the stockholders commensurate

with their percentage ownership interest.

I would conclude that Edwards’s allegations, if true, are sufficient to establish that

the directors are paying Eastland’s profits in a manner that does not treat all stockholders

equally and in furtherance of two director/stockholders’ personal interest or benefit. That

is, these acts are not being undertaken with the care that an ordinarily prudent person in a

like position would use under similar circumstances.

I further determine that Edward has alleged that he has suffered a distinct injury

separate and apart from any injury suffered by Eastland. In other words, the directors’

decision to pay Eastland’s profits to its stockholders (other than to Edward) as bonus

payments instead of in the form of distributions, is causing a separate and distinct injury to

Edward. That is, unlike the other Eastland stockholders, Edward is not receiving

Eastland’s profits, and is therefore not being treated equally as far as the receipt of

corporation profits.

Turning to Edward’s remedy, as Plank instructs, “[t]he remedy for the breach is

dependent upon the type of fiduciary relationship, and the historical remedies provided by

41

law for the specific type of fiduciary relationship and specific breach in question, and may

arise under a statute, common law, or contract.” Id. A “court should consider the nature

of the fiduciary relationship and possible remedies afforded for a breach, on a case-by-case

basis.” Id. In his specific prayers for relief related to Count II, Edward asserts that he is

seeking compensatory damages. In other general paragraphs of the complaint common to

all counts, as well as the remedies he specifically seeks for a violation of Count I that I

describe below, he seeks equitable remedies in the nature of the continued payment of

cor

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