Bontempo v. Lare

217 Md.App. 81

90 A.3d 559

David S. BONTEMPO

v.Clark J. LARE, et al.

No. 678, Sept. Term, 2012.

Court of Special Appeals of Maryland.

April 30, 2014.

Geoffrey H. Genth (Catherine M. Manofsky, Kramon & Graham, PA, on the brief) Baltimore, MD, for appellant.

Niccolo N. Donzella (Siobhan R. Keenan, Baxter, Baker, Sidle, Conn & Jones, PA, on the brief) William J. Murphy (John J. Connolly, Zuckerman, Spaeder, LLP, on the brief) Baltimore, MD, for appellee.

Panel: EYLER, DEBORAH S., WRIGHT, NAZARIAN, JJ.¹

NAZARIAN, J.

Table of Contents

I.

BACKGROUND

565

A.

A Promising Start

565

B.

Growing Revenue And Growing Perks

566

C.

The Relationship Sours And Unravels

567

D.

The Aftermath

568

E.

The Litigation

569

1.

Pleadings

569

2.

The Trial Court's Initial Findings

570

a.

Count I

571

b.

Count II

572

c.

Counts III and IV

572

d.

Count V

572

3.

The Trial Court's Subsequent Findings Pursuant To The Parties' Post–Trial Motions

573

a.

The Motions To Alter Or Amend The Judgment

573

b.

The May 8, 2012 Post–Trial Order

574

c.

The May 22, 2012 Supplemental Memorandum Opinion

575

4.

The Final Tally

575

II.

DISCUSSION

575

A.

Rights, Duties, And Litigation In Closely Held Corporations

577

B.

The Circuit Court Did Not Abuse Its Discretion In Crafting Alternative Equitable Relief For Count I, The Dissolution Claim

578

1.

The Shareholders' Agreement Defines The Parties' Rights And The Range Of Appropriate Remedies

578

2.

The Circuit Court Did Not Err In Granting Summary Judgment For The Lares In Their Personal Capacity

584

C.

The Damages Awarded Under Count III Did Not Make Quotient Whole

585

1.

The Lares Breached Duties, But Did Not Remedy The Breach

586

2.

The Circuit Court Did Not Err In Declining To Find Fraud Or Impose Punitive Damages

588

3.

On Remand, The Circuit Court Must Reconsider The Attorneys' Fees Award

589

D.

Count V: Mr. Bontempo's Equal Compensation Claim

591

Like marriages, business relationships sometimes fail, and the process of disentanglement can be messy and painful. The relationship in this case revolves around an information technology company called Quotient, Inc. (“Quotient”) that was owned by longtime business associates Clark Lare (and his wife, Jodi) and David Bontempo. Like a new romantic relationship, the business flourished in its early stages. Like some marriages, the relationship between Mr. Lare and Mr. Bontempo eventually became strained, then unraveled. And not unlike those marriages that end up in the courts, the parties could not agree on how to distribute their respective assets and manage the company going forward after Quotient terminated Mr. Bontempo's employment in 2008, and Mr. Bontempo brought suit, both individually and on behalf of Quotient, in the Circuit Court for Howard County.

For the reasons we explain below, we affirm the circuit court's core liability findings in Mr. Bontempo's favor, and we disagree with Mr. Bontempo's contention that the court abused its discretion in declining to dissolve and dismember Quotient. We hold as well, however, that the circuit court erred in the way it allocated liability for monetary damages and attorneys' fees arising from Mr. Bontempo's derivative claims. And because, similar to divorce cases, the damage and attorneys' fees awards are inextricably intertwined, we vacate the awards for damages and attorneys' fees and costs relating to Count III and remand for further proceedings not inconsistent with this opinion.²

I. BACKGROUND

A. A Promising Start

Mr. and Ms. Lare formed Quotient in 1999. At first, they operated the business out of their home and financed it with personal savings and cash advances on their credit cards. Under their initial shareholder agreement, which they executed in November 2000, Mr. Lare held forty-nine percent of the stock and Ms. Lare owned the rest. At first, Mr. Lare traveled to solicit clients for their fledgling company while Ms. Lare continued to support the couple as a pharmacist and part-owner of Watermont Pharmacy (“Watermont”).

Early on, Mr. Lare successfully converted a referral from his former co-worker, David Bontempo, into a contract to provide informational technology services to the United States Census Bureau.³ Soon after, Mr. Lare hired Mr. Bontempo to work for Quotient and made him a minority shareholder. The parties executed an amendment to the shareholder agreement (the “Shareholder Agreement”) that gave Mr. Bontempo forty-five percent of Quotient, Mr. Lare four percent, and Ms. Lare fifty-one percent. In exchange, Mr. Bontempo executed a promissory note in the amount of $46,800. Although Mr. Lare testified that he expected the note to be repaid, Mr. Bontempo claimed that it existed only for accounting purposes: ⁴

[COUNSEL FOR THE LARES:] Now, do you remember that at one point in time though, you did execute a promissory note to pay for that stock?

[MR. BONTEMPO:] I do.

* * *

[COUNSEL FOR THE LARES:] [Exhibit 7] is a non-negotiable promissory note dated effective March 21, 2001, for forty-six thousand eight hundred dollars, isn't it?

[MR. BONTEMPO:] Yes.

* * *

[COUNSEL FOR THE LARES:] Okay, and ah, that was for the stock that he conveyed to you, isn't it? Wasn't that the purpose?

* * *

[MR. BONTEMPO:] Um, the purpose of this more was for an accounting record, that there was some value transferred to me, and that there was—Clark and I had an agreement, there was no money to be exchanged for this agreement.

The parties never signed a written employment agreement, but they agreed orallythat Mr. Bontempo would receive an initial salary of $20,000, and he received his first paycheck in February 2000. The Lares, on the other hand, did not draw a salary until December 2001. Mr. Bontempo contended that he and Mr. Lare reached an additional understanding that once the Lares started to draw a salary, he would draw a salary equal to the combined salaries of the Lares:

[COUNSEL FOR THE LARES:] ... [I]s there a piece of paper anywhere that you have seen in this case that says that there will be equivalent salaries that I, Dave Bontempo, will receive the same amount in salary as the Lares, or Clark Lare, the Lares in combination, is there any such agreement that you are aware of?

[MR. BONTEMPO:] No, there is not, on paper, written down. But, we did have an oral agreement.

The Lares disputed that such an agreement ever existed:

[COUNSEL FOR THE LARES:] Ah, did you have discussions during the period of 2000 to 2003 about, ah, whether your salaries should be equal to, or commensurate with Mr. Bontempo?

[MR. LARE:] No, no.

From April 2004 through August 2008, Mr. Bontempo's salary was comparable, and sometimes equal, to the salary received by the Lares. At all other times, however, their salaries differed significantly.

Mr. Lare's and Mr. Bontempo's respective responsibilities for running Quotient also evolved over time.⁵ At first, they both focused on soliciting clients and building new business. Later on, Mr. Lare focused more on management and operations, while Mr. Bontempo pursued new business and built and maintained client relationships. Later, on March 20, 2004, the three shareholders entered an Amended and Restated Stockholders' Agreement (the “ARSA”). The ARSA restated (and did not alter) the parties' stock ownership and set forth the events that would trigger a compulsory stock sale to the other shareholders, including “[t]ermination of a Shareholder's employment ... for good cause.”

B. Growing Revenue And Growing Perks

Quotient ultimately qualified for a General Services Administration (“GSA”) schedule, which meant that the company could submit bids as a prime contractor for federal government contracts, and it quickly secured contracts with a number of large public and private organizations.⁶ With revenue growing, Quotient moved into office space in Columbia, Maryland in 2001, and has moved several times since to accommodate its continued growth.

In addition to the salaries Quotient paid to Messrs. Lare and Bontempo, the company covered cell phone expenses for both the Bontempos and the Lares. Quotient purchased automobiles for Mr. Bontempo's wife and for Ms. Lare. The Bontempos were issued company credit cards that they used for gas, meals, and entertainment. And Quotient paid for Mr. Lare and other Quotient employees to train with a corporate fitness training company, and for the Lares' personal trainers.

In 2006, the Lares also began paying household employees from Quotient's payroll account,⁷ using Quotient funds for personal legal fees, and advancing interest-free loans to Watermont and Broadway Equities, LLC (“Broadway”), a company Mr. Lare formed with his brother to own a beach house in New Jersey. In December 2007, Mr. Lare borrowed $205,586 from Quotient to fund renovations to the Lares' home. This loan originally was to be repaid by March 1, 2009, but on February 1, 2009, Mr. Lare executed a new note in the amount of $497,267.00, with the balance due on January 1, 2016.⁸ The Lares eventually agreed that many of these expenses should have been treated as additional income, and they filed amended tax returns both for themselves and Quotient for tax years 2006 through 2009.

C. The Relationship Sours And Unravels

The once-fruitful partnership between Mr. Lare and Mr. Bontempo eventually began to spoil. Mr. Lare's personal use of Quotient funds fueled a growing friction between him and Mr. Bontempo, and their mutual animosity became apparent to other employees. Mr. Bontempo blamed the discord on a series of unilateral decisions Mr. Lare made regarding distributions and salaries:

Bontempo alleges that, in 2007, Lare took a $100,000.00 distribution and asked Bontempo to wait until the end of the year to take his distribution, but then [Lare's] distribution was converted to a loan which obviated the need to make a similar distribution to Bontempo. According to Bontempo, this also happened in 2008. Another source of conflict was the disparity in Bontempo and Lare's salaries in 2008. Bontempo's salary increased to $244,791.73 that year, and Lare's...