Lyon v. Campbell ( 2000 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
JOHN W. LYON,
Plaintiff-Appellant,
v.
No. 99-2455
LARRY A. CAMPBELL; EDWARD W.
STORKE; ROBERT R. COOK,
Defendants-Appellees.
Appeal from the United States District Court
for the District of Maryland, at Baltimore.
Frederic N. Smalkin, District Judge.
(CA-98-1129-S)
Argued: May 4, 2000
Decided: July 19, 2000
Before WILKINSON, Chief Judge, and NIEMEYER and
MICHAEL, Circuit Judges.
_________________________________________________________________
Affirmed in part, vacated in part, and remanded by unpublished per
curiam opinion.
_________________________________________________________________
COUNSEL
ARGUED: Barry Coburn, COBURN & SCHERTLER, Washington,
D.C., for Appellant. Gerard Patrick Martin, MARTIN, SNYDER &
BERNSTEIN, P.A., Baltimore, Maryland, for Appellees. ON
BRIEF: Steven F. Wrobel, MARTIN, SNYDER & BERNSTEIN,
P.A., Baltimore, Maryland; Thomas J. Zagami, HODES, ULMAN,
PESSIN & KATZ, P.A., Towson, Maryland, for Appellees.
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
John Lyon, a fifty percent shareholder of ICE, Inc. (ICE), brought
this diversity action against Larry Campbell, Edward Storke, and
Robert Cook, the three directors of L-C, Inc. (L-C), a company
wholly owned by ICE. Lyon alleges that the defendants committed
various wrongs in connection with the sale of a tract of land owned
by L-C. The district court (1) dismissed Lyon's implied contract
claim, (2) granted summary judgment to the defendants on Lyon's
claims that they breached their fiduciary duties and violated Mary-
land's Corporations and Associations Code, and (3) denied Lyon's
motion to file a second amended complaint. We affirm the dismissal
of the contract claim, vacate the award of summary judgment on the
other claims, and affirm the denial of the motion to amend.
I.
We recite the facts in the light most favorable to Lyon, the nonmo-
vant in the summary judgment proceedings. Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 255 (1986). Lyon and Campbell were
involved together in business deals for many years. According to the
district court, the two men are now enveloped in a"cloud of acri-
mony." Lyon v. Campbell, Civ. No. S 98-1129, mem. op. at 1 (D. Md.
Oct. 1, 1999). In 1971 Lyon and Campbell formed ICE, a holding
company. It appears that Lyon still owns a fifty percent share of ICE
and that Campbell owns the other fifty percent. L-C is wholly owned
by ICE. Lyon was on the board of directors of L-C until May 1995.
Campbell and Storke have continued to serve as directors of L-C, and
Cook became a director (replacing Lyon) in May 1995.
In 1974 L-C bought (for $495,000) an 80-acre tract of land called
Oxen Cove, which is located partly in Prince George's County, Mary-
land, and partly in the District of Columbia. L-C bought the Oxen
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Cove property for the purpose of operating a landfill, but the company
was unable to obtain the necessary permits. For the next twenty years
Lyon and Campbell tried without success to sell Oxen Cove. Finally,
in January 1995 a representative of Corrections Corporation of Amer-
ica (CCA) contacted Lyon, advising him that CCA was interested in
the property for a prison site. Later that month Lyon received a pro-
posed option contract from CCA that would have allowed CCA to
buy Oxen Cove for $2.28 million. On January 18, 1995, Lyon wrote
to Campbell and Storke, forwarding CCA's proposal and requesting
a special meeting of the board of directors of L-C and ICE so that
CCA's interest in buying the property could be explored. In a reply
to Lyon, dated February 28, 1995, Campbell said that CCA's pro-
posed terms, especially the price, were unacceptable. Campbell
believed that the "asking price for the property should be in the area
of $6-1/2 to $7 million."
The L-C board of directors (Lyon, Campbell, and Storke) finally
met on April 17, 1995, to consider the option contract proposed by
CCA. Early in the meeting Campbell expressed his concerns about
CCA's offering price and the duration of the proposed option. Only
at the end of the meeting when Storke made a motion to reject CCA's
current proposal, did Lyon say he was "willing to accept the contract
as offered." Lyon quickly added, however, that he was willing, in
order to achieve unanimity, to accept Campbell and Storke's sugges-
tion that L-C hire a real estate consultant, who would assist the com-
pany in evaluating CCA's proposal and in negotiating with CCA. The
L-C board then authorized Campbell to contact a consultant for a fee
proposal, and the consultant was engaged within a few days.
At the April 17, 1995, L-C board meeting, Storke asked Lyon if he
had sold or collateralized his ICE shares. Lyon responded that he had
not. That was not true. At the time of the L-C board meeting Lyon
was the defendant in an adversary proceeding in the bankruptcy of
Excavation Construction, Inc. (ECI), a "Lyon-Campbell business ven-
ture that failed." Lyon v. Campbell, Civ. Action No. S 98-1129, mem.
op. at 2 (D. Md. Oct. 1, 1999). The trustee alleged that Lyon had
guaranteed substantial obligations that another company owed to the
debtor (ECI), and the trustee sought to collect on Lyon's guarantee.
Lyon admits that on April 11, 1995 (six days before the L-C board
meeting), he and the trustee orally advised the bankruptcy judge in the
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ECI case that the adversary proceeding against Lyon had been settled.
See Br. of Appellant at 8. Although Lyon and the trustee did not sign
a settlement agreement until October 6, 1995, the agreement reflected
that Lyon would (1) use his best efforts to sell Oxen Cove, (2) pay
over a substantial portion of the sale proceeds (up to $1 million) to
the trustee, and (3) pledge his stock in ICE to the trustee as security.
On April 26, 1995, nine days after the April 17, 1995, meeting of
the board of directors of L-C, Lyon advised his fellow director,
Campbell, that he had pledged his ICE stock to the ECI trustee.
Campbell and Storke (acting as directors of ICE) reacted swiftly: a
special meeting of the ICE board was called for May 15, 1995. At that
meeting Campbell and Storke removed Lyon as a director of L-C and
elected Cook in his place. Campbell said this action was taken against
Lyon because he "no longer shared the long term business interest of
L-C" as a result of his pledge of the ICE stock and his assignment of
a portion of the proceeds from any sale of Oxen Cove.
After Lyon was removed from L-C's board, the reconstituted board
(Campbell, Storke, and Cook) continued to negotiate with CCA for
the sale of Oxen Cove. Eventually, on August 30, 1996, L-C sold the
property to CCA for $4 million. Lyon claims that despite his repeated
requests, Campbell and the other two L-C directors failed and refused
to provide him with any details about the sale of Oxen Hill or the dis-
bursement of sale proceeds. Lyon does concede that $1 million went
to the ECI trustee to satisfy Lyon's obligation that was secured by his
pledge of ICE stock. (After the trustee was paid, he returned the ICE
stock certificate to Lyon.) Campbell admits that he did not provide
Lyon with any information about the sale and that he (Campbell) did
not feel that he had any obligation to make an accounting to Lyon.
In any event, it appears that over $2 million of the Oxen Hill sale pro-
ceeds went to Campbell. Campbell maintains that he was entitled to
the balance of the sale proceeds as reimbursement for his payment of
certain notes that had been guaranteed by Campbell and Lyon and
that were held by Dominic F. Antonelli. Lyon and Antonelli have
signed affidavits saying that Lyon and Campbell had each paid their
one-half share of this obligation by 1990, well before the Oxen Hill
sale.
Finally, after Campbell paid the ECI trustee the $1 million to sat-
isfy Lyon's settlement debt to the estate, the trustee executed a release
4
that discharged Campbell and "all persons acting in concert" with him
from any claims arising out of or related to the ECI bankruptcy.
Lyon sued Campbell, Storke, and Cook in federal district court in
Maryland, alleging, among other things, (1) that Campbell, by failing
to tender to Lyon his share of the Oxen Hill sale proceeds, breached
an implied contract between Lyon and Campbell governing how the
assets of ICE and L-C would be used and distributed, (2) that Camp-
bell, Storke, and Cook, as directors of L-C, breached their fiduciary
duty to him (Lyon) by failing to pay him his share of the proceeds
from the Oxen Hill sale and by failing to respond to his repeated
requests for information, and (3) that Campbell, Storke, and Cook
violated the Maryland Corporations and Associations Code (a) by
failing to perform their duties as directors in good faith, in the best
interests of L-C, and in accordance with the applicable standard of
care and (b) by engaging in conduct that was illegal, oppressive, or
fraudulent.
The district court granted Campbell's motion to dismiss the con-
tract claim on the ground that "the Court knows of no authority for
the proposition that the formation of a corporation is accompanied by
an implied contractual provision with regard to the distribution of cor-
porate assets, short of liquidation." Lyon v. Campbell, Civ. No. S 98-
1129, mem. and order at 3 (D. Md. Nov. 18, 1998). Later, the district
court granted summary judgment for the defendants on the ground
that Lyon's remaining claims were barred by the doctrine of unclean
hands and by a release. In the alternative, the district court held (1)
that Lyon's common law breach of fiduciary duty claim was barred
by the business judgment rule and (2) that Lyon's two Maryland cor-
porate law claims were not actionable, either because of the business
judgment rule or because Lyon had failed to show any evidence of
bad faith. Finally, the district court denied Lyon's motion to file a sec-
ond amended complaint. Lyon now appeals.
II.
A.
First, Lyon argues that the district court erred when it held that
Lyon's action is barred by his unclean hands. We agree with Lyon,
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at least at this stage. The unclean hands doctrine allows a court to
reject the claim of a party who is guilty of "willful wrongdoing in
relation to the controversy before it." Bland v. Larsen, 627 A.2d 79,
85 (Md. Ct. Spec. App. 1993) (quoting Manown v. Adams, 598 A.2d
821, 824-25 (Md. Ct. Spec. App. 1991), vacated on other grounds,
615 A.2d 611 (Md. 1992)). The district court said that Lyon had
unclean hands because he withheld information from his fellow direc-
tors about his settlement with the ECI bankruptcy trustee and because
he urged the directors to sell Oxen Cove for $2 million. Lyon did
wrongfully withhold information from the L-C board about his con-
flict (the stock pledge and settlement). Despite this initial failure to
disclose, Lyon did not push for a quick or uninformed decision on the
CCA offer when the other directors suggested that they hire a consul-
tant to advise them on the market value of Oxen Cove. Moreover, as
soon as Lyon disclosed his conflict, he was removed from the L-C
board. Lyon's delay (of about ten days) in making the disclosure did
not prevent the reconstituted L-C board from engaging in full and
unhurried negotiations with CCA on the sale of Oxen Cove. The pro-
tracted negotiations, which Lyon was not a part of, appear to have dis-
sipated any effect from Lyon's initial nondisclosure. The unclean
hands doctrine applies to willful wrongdoing in relation to the claim
being litigated. Lyon's claims in this lawsuit go to what the board (or
Campbell) did with the proceeds of the sale and the board's failure
to make any accounting to Lyon. It does not appear from the sum-
mary judgment record that Lyon is barred by unclean hands because
his own nondisclosure in the beginning is not sufficiently related to
his claim that the L-C board wronged him at a later time.
Second, Lyon argues that the district court erred when it held that
Lyon's claims are barred by a release that the ECI bankruptcy trustee
executed in favor of Campbell "and all persons acting in concert with
him." The document releases Campbell and his associates from all
claims arising out of or related to the ECI bankruptcy. The district
court said that the release was a bar because (1) the trustee "had com-
plete control over Lyon's interest in [ICE] under the pledge agree-
ment" and (2) Lyon's personal liability to the estate was satisfied by
Campbell with proceeds from the sale of Oxen Cove. We conclude
that the release is not a bar to Lyon's claims. The settlement agree-
ment between Lyon and the trustee provided that"Lyon is and shall
remain the legal and equitable owner of 2,500 shares of stock in ICE,
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which constitute 50% of all of the issued and outstanding shares of
stock in ICE." The trustee had a pledgee's interest in Lyon's stock,
and he returned the stock certificate to Lyon once Lyon's obligation
was satisfied. The trustee did not have the power to-- and did not
purport to -- release Lyon's residual rights as a shareholder of ICE.
Third, Lyon contends that the district court erred in its alternative
holding that Lyon's common law breach of fiduciary duty claim is
barred by the business judgment rule. Again, we agree that summary
judgment should not have been granted on this ground. The business
judgment rule supplies "a presumption that directors of a corporation
act in good faith" and in the best interests of the corporation. Zimmer-
man v. Bell, 800 F.2d 386, 392 (4th Cir. 1986). See also Wittman v.
Crooke, 707 A.2d 422, 425 (Md. Ct. Spec. App. 1998). Lyon has
proffered sufficient evidence (for summary judgment purposes) to
rebut this presumption. Lyon proffers at least the following: (1) the
L-C directors would not provide Lyon with information about what
happened to all of the proceeds from the Oxen Cove sale, (2) Camp-
bell admitted that he would not communicate with Lyon (or his repre-
sentative) about the sale, and (3) although Campbell claims he was
entitled to the balance of the Oxen Hill proceeds as reimbursement for
his payment of certain notes guaranteed by him and Lyon, the holder
of the notes says that they were paid off -- on a 50-50 basis by Lyon
and Campbell -- well before the Oxen Cove sale.
Fourth, Lyon argues that the district court erred in its alternative
holding that his claims under the Maryland Corporations and Associa-
tions Code are not actionable. The district court awarded judgment to
the defendants on Lyon's claim under Md. Code Ann. Corps. &
Ass'ns § 2-405.1 (relating to the standard of care required of direc-
tors) on the ground that this claim is also barred by the business judg-
ment rule. Because (as we just mentioned) Lyon has proffered
evidence to rebut the presumption of the business judgment rule, his
claim under § 2-405.1 may go forward. The district court also
awarded judgment to the defendants on Lyon's claim under Md. Code
Ann. Corps. & Ass'ns § 3-413 (relating to the involuntary dissolution
of a corporation) on the ground that Lyon did not show any "illegal,
oppressive, or fraudulent" conduct by the L-C directors. On the con-
trary, Lyon has proffered evidence that he was kept in the dark about
the Oxen Hill sale and that the proceeds were disbursed in a way that
7
illegally diminished the value of his interest in L-C. As a result,
Lyon's claim under § 3-413 may also go forward.
B.
Lyon argues that the district court erred in dismissing his implied
contract claim and in denying his motion to file a second amended
complaint. Finding no error in these rulings, we affirm them on the
reasoning of the district court. See Lyon v. Campbell, Civ. No. S 98-
1129 (D. Md. Nov. 18, 1998) (dismissing contract claim); Lyon v.
Campbell, Civ. No. S 98-1129 (D. Md. Aug. 6, 1999) (denying
motion to file second amended complaint).
III.
For the forgoing reasons, we vacate the district court's award of
summary judgment for the defendants on Lyon's common law claim
of breach of fiduciary duty and his statutory claims under Md. Code
Ann. Corps. & Ass'ns §§ 2-405.1 and 3-413. The case is remanded
for further proceedings on these claims. We, of course, express no
opinion on what the ultimate outcome should be in this case -- a case
described by the district court as the "latest battle in the marathon liti-
gative war between the Lyon and Campbell interests." Lyon v. Camp-
bell, Civ. No. S 98-1129 (D. Md. Nov. 18, 1998).
Finally, we affirm the district court's dismissal of Lyon's claim for
breach of contract and the court's denial of his motion to file a second
amended complaint.
AFFIRMED IN PART, VACATED IN PART,
AND REMANDED
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