Eastland Food Corp. v. Mekhaya

1

EASTLAND FOOD CORPORATION, et al. v. EDWARD MEKHAYA

No. 37-2022

Maryland Supreme Court

August 31, 2023

IN THE SUPREME COURT OF MARYLAND ^[*]

Argued: June 2, 2023

Circuit Court for Howard County Case No. C-13-CV-21-000666 Fader, C.J, Watts, Hotten, Booth, Biran, Gould, Eaves, JJ

OPINION

Gould, J.

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 Maryland^[1] 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).

BACKGROUND

The Allegations of the Proposed Amended Complaint^[2]

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 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.

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."

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 Thaitan. 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.

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 [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

...