MAS Associates v. Korotki

MAS Associates, LLC, et al. v. Harry S. Korotki, No. 57, September Term, 2018, Opinion
by Adkins, J.
CORPORATIONS AND ASSOCIATIONS – PARTNERSHIPS – INTENT TO
FORM A PARTNERSHIP – COMPETENT MATERIAL EVIDENCE: The party
asserting the existence of a partnership bears the burden of producing sufficient facts to
conclusively demonstrate the parties’ intent to form a partnership. See Miller v. Salabes,
225 Md. 53, 55 (1961). Intent can be explicit or based on the parties’ conduct and the
surrounding circumstances. Sharing profits and losses, equal management authority,
making capital contributions, and whether the parties were concurrently seeking to form
another type of business entity can all be factors the courts consider when evaluating intent.
Here, the trial court made an error of law when it concluded that Harry Korotki’s $275,000
in payments to Saralee Greenberg were capital contributions for a new entity, and to the
extent that it applied a presumption of partnership based on receipt of profits, it also made
an error of law. As for the other factors and evidence, taken together, the record lacks
competent material evidence to conclude the parties formed a partnership and the trial court
was clearly erroneous in concluding that they did.
Circuit Court for Baltimore County
Case No.: 03-C-11-010759
Argued: March 1, 2019
IN THE COURT OF APPEALS
OF MARYLAND
No. 57
September Term, 2018
MAS ASSOCIATES, LLC, et al.
v.
HARRY S. KOROTKI
Barbera, C.J.
*Greene
McDonald
Watts
Hotten
Getty,
Adkins, Sally D.,
(Senior Judge, Specially Assigned)
JJ.
Opinion by Adkins, J.
Pursuant to Maryland Uniform Electronic Legal Materials Act
(§§ 10-1601 et seq. of the State Government Article) this document
is authentic. Filed: August 8, 2019
2019-08-08 *Greene, J., now retired, participated in the
10:39-04:00
hearing and conference of this case while an
Suzanne C. Johnson, Clerk active member of this Court; after being recalled
pursuant to the MD. Constitution, Article IV,
Section 3A, he also participated in the decision
and adoption of this opinion.
Those who run small businesses must engage in the complex concerns competing
for attention that will affect the bottom line. They have little time to focus on the legal
structure of their business entity, and often even less interest in doing so. But the need for
clarity regarding legal structure and financial relations between parties can become acute,
and business people who ignore these needs live to regret ignoring their lawyer’s advice.
This case can be viewed as either a business lawyer’s nightmare—or a poster child for such
lawyer’s public relations messaging.
Today we examine the dealings of three men engaged in mortgage lending who,
after initially recognizing the need for legal structure in their business relationship, failed
to consummate plans for acquiring membership interests in a long-existing Limited
Liability Company—and the unfortunate fall-out from that failure. The question presented
is whether competent material evidence exists in the record to support the trial court’s
conclusion that the parties intended to form a general partnership.1 We conclude that the
evidence cannot sustain the simultaneous intent to form both an LLC and a partnership,
and Respondent failed to provide competent material evidence demonstrating intent to
form a partnership. Thus, we reverse the trial court’s determination.
1
We have slightly rephrased the question presented from the precise question
granted: “Did the trial court misinterpret and misapply the Revised Uniform Partnership
Act, in conflict with the LLC Act, by creating a partnership among three non-member
employees of a longstanding LLC after their attempts to negotiate an amendment to the
LLC’s 2004 Operating Agreement with its members failed?”
FACTUAL OVERVIEW AND PROCEDURAL POSTURE
Factual Background
Three Separate Entities
Harry Korotki (“Harry”),2 the plaintiff in the trial court, has worked in the mortgage
industry in various capacities since 1991. In 1999, after the company he worked for
suffered a “financial crisis,” Harry had to “start over” and opened Savings First Mortgage,
LLC with another individual. In 2002, this individual dissociated from Savings First, and
Harry became the sole owner. By 2009, business was “very challenged,” with banks “not
as liberal with [credit] lines,” which resulted in it becoming more difficult for “loan officers
to go out and sell loans,” and thereby negatively impacting profitability.
Joel Wax (“Joel”), a defendant in the trial court proceeding, was the sole owner of
Greentree Mortgage Corporation. Greentree also experienced “economic difficulties”
beginning around 2009.
Mark Greenberg (“Mark”), also a defendant, had also been in the mortgage industry
for a significant amount of time. In 1999, after working for various other mortgage
companies, Mark and his wife, Saralee Greenberg (“Saralee”), started MAS Associates,
LLC (“MAS”). Saralee became a member of MAS, with a controlling 91% share of
interest, and Mark became the manager and CEO and held no ownership interest. MAS
was involved in three different lines of business: originating home purchase and
2
In their briefs, the parties have referred to each other using first names only. For
the sake of consistency and clarity, we do the same.
2
refinancing loans, selling home improvement loans, and servicing high-risk loans. MAS
was also struggling with business losses in 2009.
Initial Conversations About Combining Entities
In August 2009, with both of their businesses losing money, Harry and Joel engaged
in negotiations with the intent to merge their companies and increase profitability. At one
point, Joel mentioned drafting a “partnership agreement” and it seems the parties
anticipated sharing profits, with Harry stating that “50% of what we can generate together
is a whole lot more money that [sic] 100% of what we are making individually.” During
these conversations, Joel also stated that, “as partners,” he “agree[d] that everything should
be equitable.”
Nevertheless, Harry and Joel’s planned merger was put on hold when, in September
2009, Ken Venick (“Ken”), a member of MAS Associates, LLC who held a 9% share of
interest, and Mark, expressed interest in “getting involved” in the merger. While Saralee
never authorized Mark to sign for her regarding ownership decisions nor did she give him
power of attorney, he “represented [her] full interests” in the management of MAS. Under
this newly proposed scenario, it was suggested that Equity Mortgage Lending, a registered
tradename for MAS Associates, LLC, was the optimal entity for “everyone to fall
into . . . .” The parties concluded that Equity Mortgage Lending was the ideal surviving
entity because it had a “good track record” in the industry and fewer “legacy liabilities.”
The four men then embarked anew on discussions regarding how their three
companies might sensibly “merge as one business” and the potential ramifications of such
an action. A September 30, 2009 letter from Gordon, Feinblatt, Rothman, Hoffberger &
3
Hollander, LLC (“Gordon Feinblatt”), a law firm serving as “regulatory counsel” to all
three entities, described this plan as one “to join forces and establish a business together in
some to-be-determined manner.” As part of this initial effort, Harry sent an October 1,
2009 email to a large mortgage loan originator seeking to apply for a warehouse credit line3
for Equity Mortgage Lending. Harry characterized his interest in this new association as
being a “[one-third] owner along with two other partners.”
Attempt to Become Members of MAS Associates, LLC
Harry, Joel, and Mark held a meeting on October 13, 2009 to discuss their proposed
business structure. They were joined by Elliott Cowan (“Cowan”) and Marjorie Corwin
(“Corwin”), the regulatory attorneys from Gordon Feinblatt, who had taken on the task of
creating a “neutral” draft of the parties’ business arrangement. After the meeting, Cowan
prepared and circulated a summary of the meeting for review by Harry, Joel, Mark, and
their personal legal representatives. This document represents the first unambiguous
indication that Harry, Joel, and Mark intended to become members of MAS Associates,
LLC, d/b/a Equity Mortgage Lending, replacing Saralee and diminishing Ken’s ownership
percentage.
3
Warehouse lending is “a line of credit given to a loan originator. The funds are
used to pay for a mortgage that a borrower uses to purchase property.” Warehouse
Lending, Investopedia (last updated May 23, 2019), https://www.investopedia.com/
terms/w/warehouse_lending.asp [archived at https://perma.cc/72VA-94YB].
“In warehouse lending, a bank handles the application and approval of a loan but obtains
the funds for the loan from a warehouse lender.” Id. Thus, it is “a means for a bank or
similar institution to provide funds to a borrower without using its capital.” Id.
4
During the meeting, the parties discussed the “goal” of ownership in MAS, and
contemplated ownership percentages consisting of Harry at 33 1/3%, Joel at 33 1/3%, Mark
at 30 1/3%, and Ken at 3%. Functionally, this would mean that Saralee, and to a lesser
degree Ken, would transfer their interest in MAS to Mark, who would in turn transfer
membership interest to Harry and Joel. The MAS Associates, LLC Amended and Restated
Operating Agreement, adopted in April 2004 (“2004 Operating Agreement”), controlled
the operation of MAS during this time. According to Section 9.1 of the 2004 Operating
Agreement, such a transfer required a majority vote of the members.
The summary of the meeting indicated that the potential arrangement structured the
deal into an “Interim Period” and a “Post-Interim Period.” During the Interim Period,
Harry and Joel were to be “employees of the Company” subject to for-cause termination
and “entitled to receive W-2 compensation equal to 1/3 of the profits of the ‘origination
division’ of the Company . . . .” Their respective companies—i.e., Savings First and
Greentree—were to be liquidated and their mortgage lending licenses surrendered.
Significantly, the parties never discussed “what would happen if the conditions for Harry
and Joel to obtain substantial ownership [were] not obtained by the end of the Interim
Period.” According to Joel, the Interim Period was intended to be a time during which
transitional issues, such as licensing and operations, could be ironed out.
In November 2009, Equity Mortgage Lending arranged to purchase much of
Savings First’s physical inventory. The parties also made plans to combine staff, and, in
December 2009, they moved under one roof. During this time, Saralee authorized Harry,
Joel, and Mark to be signatories on five Equity Mortgage Lending bank accounts. The
5
Bank of America paperwork formalizing this transaction denotes Mark as MAS’s President
and lists both Harry and Joel as Vice Presidents. Harry, Joel, and Mark also agreed to split
the legal fees incurred as a result of combining their companies.
On November 25 and 27, 2009, Cowan emailed new drafts of the agreements to
Harry, Joel, Mark, and their respective attorneys. The first document, which Cowan termed
the “definitive agreement,” outlines the interim period, before Harry, Joel, and Mark were
to become members. We will refer to this agreement as the Interim Agreement. The
second document—which we term the Operating Agreement Outline—contemplates each
of the parties’ obligations post-membership.
This draft of the Interim Agreement, similar to the provisions outlined in the initial
meeting summary, provided that, as of November 30, 2009, Savings First and Greentree
would surrender their licenses and discontinue originating loans and that Harry and Joel
would be employees of the company for the “duration of the Approval Period.” Again, the
agreement stated that Harry and Joel were “entitled to receive W-2 compensation”; “one-
third (1/3) of the total economic benefits enjoyed in the aggregate by Mark, Saralee, Ken,
Harry, and Joel”; equivalent benefits; and “commission splits on loan originations.”
The nature of the parties’ relationship to MAS d/b/a Equity Mortgage Lending
during this interim period is central to the litigation. Harry characterizes their association
as a partnership. And it is true that, at various times via email and in other documents, the
parties referred to each other as partners, and Harry’s description of the parties as partners
regularly went unchallenged. Still, during his testimony, Joel described himself as an
“employee of MAS Associates.” In fact, he understood that one of the reasons Harry and
6
he were employees, and not owners, was to prevent personal creditors from going after
company assets. Cowan also testified that it was his “understanding that Harry and Joel
were to be employees during the interim period.” He stated that “the entire concept of the
interim period was built around an employment relationship that[,] after the approvals were
obtained and whatever other conditions there were[,] would change into a different
relationship.”4
Each party was to make a $150,000 payment to Mark, who would then gift the
$450,000 to Saralee, who would make a capital contribution to MAS d/b/a Equity
Mortgage Lending in that amount. The 2004 Operating Agreement defines “capital
contribution” as “the total amount of cash and the fair market value of any other assets of
value contributed . . . to the Company by a Member . . . .” (Emphasis added.) Thus,
Harry, Joel, and Mark, not being MAS members, could not make direct capital
contributions under the terms of the operating agreement, making an indirect route
necessary to complete such a transaction. The parties indeed made these payments,
although not necessarily in the precise manner described above.
On December 1, 2009, Cowan encouraged the parties to come to a final agreement
by pressing them to meet. He again circulated amendments to the final documents on
December 15, 2009 and recommended that the parties finalize and sign each of the
4
A November 2010 warehouse credit line application to Consumers Bank lists Mark
as the CEO of MAS and Harry and Joel as managers of the company. Neither Harry, Joel,
nor Mark are listed as having any ownership interest. Harry was also listed as a MAS
manager in the Nationwide Licensing System Consumer Access database, a national
licensing system that tracks mortgage companies and loan officers.
7
documents by December 22, 2009. As of late-January 2010, no agreement had been
reached and Ken’s attorney was still raising significant areas of disagreement between the
parties. In response to these comments, Mark’s attorney circulated amended agreements
on January 20, 2010, stating that “so far as we are concerned, you may circulate all
documents for signature.”
On February 8, 2010, Cowan again circulated the most recent versions of the various
agreements—including the Interim Agreement, the Operating Agreement Outline, and
various indemnity agreements. Nevertheless, the documents remained unsigned.5
Harry testified that, after receiving the February 8 email from Cowan, Mark
approached Harry and Joel to discuss setting the Interim Agreement “on the side” and
focusing on the Operating Agreement Outline. Harry stated that “as of that date going
forward we treated each other as owners and members.” Around this same time, the
business began experiencing losses, and Harry testified that Joel, Mark, and he “agreed that
[they] were in it for a third no matter what,” referring to potentially covering quarterly
business shortfalls. During their testimony, Joel and Mark disputed the notion that the
parties ever agreed to conduct themselves per the Operating Agreement Outline. They
claimed to have agreed to operate under the Interim Agreement until they were making
enough money to pay for the lawyers to finish the Operating Agreement Outline. All agree
5
The only agreement that was ever signed between the parties was a lease
agreement. Only Mark and Joel signed the lease—Joel as the owner of the property. Harry
claims he did not know about this agreement until the present litigation.
8
that, over the course of the next several months, the parties looked for ways to “make [the
business] work” by cutting overhead expenses and closing more loans.
After two months with no action on the matter, Cowan again emailed Harry, Joel,
Mark, and their attorneys on April 13, 2010. Cowan stated that he wanted to “take this
opportunity to urge everyone to finalize and sign the transaction documents.” He also
presciently noted that in “the absence of signed documents, sorting out everyone’s
respective rights and obligations will be very difficult, to say the least.” Harry testified
that he was “not aware” of any action taken as a result of this email. Mark testified that
the reason the Interim Agreement was never signed was because the business was not doing
well, and the parties did not want to spend more money on attorney’s fees. Joel attributed
the failure to finalize the Interim Agreement largely to Ken and his attorney.6
The warehouse lines persisted as a source of friction. The parties seem to have
intended to share exposure for these credit lines to some degree, but there was disagreement
as to how to achieve equity. In late-October 2010, Harry emailed Mark and Joel to
“remind” them that he could not “put [his] name on anything more than [one-third] of [a]
[$]7.5 million” credit line. Again, in mid-November 2010, the parties had a conversation
regarding another warehouse credit line. Via email, Harry once more expressed his
discomfort with signing jointly and severally with Joel and Mark, as Harry believed this
6
Cowan speculated that the parties might have wanted “some passage of time”
before signing the agreements because they worried that Harry’s creditors from Savings
First might take action against him. Mark disagreed with this characterization, as Harry’s
issues had been resolved by April 2010.
9
would expose his greater assets to creditors. Harry stated that he would be willing to
indemnify one-third of all business liabilities, but nothing more.
Mark responded to Harry’s concerns by insisting that any “obligations need to be
the same for all,” and reminded the parties that there must be “equity regarding potential
liabilities or the structure can not be equal.” Joel characterized Harry’s refusal to co-sign
the credit lines as “chang[ing] the game in the middle” by refusing to join the others in
guaranteeing these lines. Still, the parties looked for a way around this issue by asking
Harry to set aside sufficient assets as collateral for his one-third indemnity share, or
alternatively finding a non-member ongoing role for Harry. Cowan opined that, while it
would be unusual for a typical employee to be expected to guarantee a line of credit, such
a circumstance might not be unusual when that employee is expected to become an owner.
By the end of June 2010, Equity Mortgage Lending had begun to turn a profit and
the parties decided to begin drawing a salary of $10,000 per month each. Harry described
this distribution as an “advance on year end profits.” Profits continued into the months of
July, August, September, and October. At the end of the year, Harry, Joel, and Mark
received W-2 forms from MAS. Harry was paid a total of $325,552 in 2010—Harry
characterized this amount as a combination of salary, various profit distributions, and
commissions. Though there is some disagreement as to the details regarding the
negotiations, it appears the parties eventually settled on a 25/12.5/12.5 percentage split for
commissions—with the party originating the loan receiving the larger portion. The other
half of the gross profit was paid to the company.
10
After the year-end distribution of commissions and other income, Harry and Joel
agreed to each contribute an additional $125,000 to increase Equity Mortgage Lending’s
net worth to $1,000,000. These payments were again paid to Saralee as a loan, who would
in turn make a capital injection into the company in the same amount.7 The loans were to
be paid back in 30 days, or at the completion of the audit for which the capital injection
was made. In a February 15, 2011 email, Harry requested to be reimbursed for this loan,
and Mark replied that the parties needed to “sit down and discuss.” Harry explained that
he agreed to allow the money to remain in the company and maintains that he still has not
been repaid for his $275,000 in contributions. Yet, according to Mark, the parties made
these loans “as managers” and he testified there was no agreement that the money would
be paid back. Likewise, Joel thought of these loans as “the cost of admission” into the
company. Promissory notes for these loans were drafted but never signed.
As of November 22, 2010, the parties still contemplated becoming members, or
“owners,” of MAS and anticipated signing the Interim Agreement by the end of the year.
In a December 10, 2010 email to Joel and Mark, Harry asserted that he had no problem
signing the various agreements that had gone unsigned, but again brought up his
dissatisfaction with the warehouse loans. In late-January 2011, Saralee, Ken, Joel, and
Mark opened a $10 million warehouse line of credit. Once again, Harry refused to sign
onto a joint-and-several obligation and only agreed to indemnify the parties for up to one-
7
The purpose of this multistep process appears to be so that MAS would not have
to report the payments as liabilities and could instead count them as capital contributions
from Saralee and part of the equity of the company.
11
third of the obligation. Around this time, Harry began frequently missing work and other
obligations, such as scheduled meetings with Joel and Mark. This made it difficult for the
parties to make decisions about the business, especially regarding the warehouse line and
potential indemnification agreements for Harry.
Harry’s Resignation
In March 2011, Harry resigned from his position with Equity Mortgage Lending.
He indicated that this was pursuant to his doctor’s recommendation following months of
mental health concerns, including depression and severe anxiety. In an email dated March
20, 2011, Harry set forth an accounting of his requested compensation given his
resignation—$275,000 reimbursement for loans paid to Saralee, commission from an in-
progress loan closing, payment of health insurance premiums for two years, and, in the
case of the sale of the company, 25% of the proceeds in year one and 15% in year two. He
did not think it would be “fair” to ask for any additional cut of sale profits. Harry testified
that he subsequently met with Joel and Mark, who agreed to repay the $275,000 in loans,
but the terms of such a repayment remained unresolved.
Harry spent the first half of April 2011 attempting to arrange a meeting with Joel
and Mark to discuss the specifics of his departure. Eventually, Harry became frustrated
with their inability to meet, and, on April 13, he emailed Mark and Joel stating that he was
“retracting” his initial offer and turning the issue “over to [his] attorneys.” Harry’s
attorneys filed a complaint on October 28, 2011 in the Circuit Court for Baltimore County.
While none of the agreements were ever signed, Joel and Mark both testified that they
12
ultimately signed an extension of the Interim Agreement before it was set to expire on
November 30, 2012 and that it governed their conduct at the time of the hearing.
Procedural Posture
In his complaint, Harry raised multiple claims, including an unjust enrichment and
wage payment claim. Most relevant here, however, are his claims for breach of contract
and his request for a declaratory judgment asking for, inter alia, a determination of “the
buyout price of his partnership interest” and a demand that the partners pay such price.
The trial court first issued its opinion from the bench. Regarding the breach of
contract claim, the court stated that there could be no breach because there was no contract.
Specifically, the court held that “there was never any meeting of the minds as to either the
interim agreement or the operating agreement.” Nonetheless, the trial court found that a
partnership existed between the parties. It determined that the parties’ conduct “exhibited
what a partnership is” when they made management decisions together and contributed
money equally. Consequently, the court awarded Harry $1,097,866—$793,000 base value,
$260,712 in interest,8 and $44,154 for commissions without interest. The court also found
in favor of Harry on the unjust enrichment and wage payment claims.
In response to the defendants’ February 20, 2015 Motion to Alter, Amend, or Revise
Judgment, the trial court attempted to clarify its ruling. The court stated that the partnership
“consisted of the combined mortgaged [sic] lending business, which was equally operated
8
The Circuit Court for Baltimore County later amended this award so that the
ultimate interest paid would reflect a “rate of 10% per annum from the date of dissociation,
March 10, 2011, until the date the payment is made.”
13
and owned by” Harry, Joel, and Mark. Yet, it also stated that there was “substantial
evidence” that the partnership comprised “(1) Mr. Greenberg, (2) Mr. Wax, (3) Mr.
Korotki, and (4) MAS Associates, LLC.” It distinguished Harry, Joel, and Mark’s role
from MAS’s role by stating that MAS provided its license in exchange for “rent, utility
bills, and . . . additional funds necessary to operate the excluded businesses.”
Mark and Joel appealed the decision to the Court of Special Appeals. In an
unreported opinion, the intermediate appellate court affirmed the trial court’s ruling,
holding that Harry, Joel, and Mark “entered into a joint venture for the short period of time
between not signing the Agreement, and when they could not agree on the terms of a
merger, or sign a new interim agreement.” MAS Assocs., LLC v. Korotki, No. 228, Sept.
Term 2015, 2018 WL 4575140, at *20 (Md. Ct. Spec. App. Sept. 21, 2018). Joel and Mark
petitioned for certiorari in this Court, and we granted their petition.
DISCUSSION
Standard of Review
Pursuant to Maryland Rule 8-131(c), “[w]hen an action has been tried without a
jury, the appellate court will review the case on both the law and the evidence.” We will
“not set aside the judgment of the trial court on the evidence unless clearly erroneous,”
giving “due regard” to the trial court’s opportunity to “judge the credibility of the
witnesses.” Id. “If any competent material evidence exists in support of the trial court's
factual findings, those findings cannot be held to be clearly erroneous.” Webb v. Nowak,
433 Md. 666, 678 (2013) (citations omitted). The “competent material evidence” standard
has never required that the record lack even a modicum of evidence in support of the trial
14
court’s finding, as a literal reading of the words might suggest. See Cassell v. Pfaifer, 243
Md. 447, 454 (1996) (concluding that the evidence offered “lack[ed] that degree of
substantiality which would require us to affirm the trial court” and the court’s factual
finding was, therefore, clearly erroneous); Fuge v. Fuge, 146 Md. App. 142, 180–82 (2002)
(reversing a trial court’s factual conclusion that a father lacked the “ability” to contribute
to his children’s private school tuition); Banks v. State, 8 Md. App. 182, 186–87 (1969)
(reversing a trial court’s factual conclusion where there was no “legally sufficient
evidence” to support its determination). See also Clearly-Erroneous Standard, Black’s
Law Dictionary (11th ed. 2019) (“Under this standard, a judgment will be upheld unless
the appellate court is left with the firm conviction that an error has been committed.”).
Rather, it is simply a highly deferential evidentiary review.9
The existence of a partnership based on the intent of the parties is an issue of fact,
and, thus, it is reviewed using the clearly erroneous standard. See Parkinson v. Parkinson,
42 Md. App. 650, 657 (1979) (“A determination as to the intention of the parties is a
determination of fact, which an appellate court is not at liberty to set aside or ignore unless
it concludes that the finding is clearly erroneous.”) (citation omitted). We review the
9
This view is not only supported in our case law, but it is also the leading view in
United States courts, most prominently articulated by the United States Supreme Court in
United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948) (“A finding is ‘clearly
erroneous’ when although there is evidence to support it, the reviewing court on the entire
evidence is left with the definite and firm conviction that a mistake has been committed.”).
This case was based on the Court’s interpretation of the clearly erroneous standard as
outlined in Federal Rule of Civil Procedure 52(a)(6), which provides: “Findings of fact,
whether based on oral or other evidence, must not be set aside unless clearly erroneous,
and the reviewing court must give due regard to the trial court’s opportunity to judge the
witnesses’ credibility.”
15
evidence “in a light most favorable to the prevailing party.” Geo. Bert. Cropper, Inc. v.
Wisterco Invests., Inc., 284 Md. 601, 620 (1979). Still, the party alleging that the parties
intended to form a partnership has the burden of proving that intent. See Miller v. Salabes,
225 Md. 53, 55 (1961) (citations omitted).
When a trial court decides legal questions or makes legal conclusions based on its
factual findings, we review these determinations without deference to the trial court. See
Ins. Co. of N. Am. v. Miller, 362 Md. 361, 372 (2001) (citation omitted). “Where a case
involves the application of Maryland statutory and case law, our Court must determine
whether the lower court’s conclusions are legally correct under a de novo standard of
review.” Spaw, LLC v. City of Annapolis, 452 Md. 314, 338 (2017) (citations omitted).
Maryland Partnerships and Limited Liability Companies
In Maryland, Limited Liability Companies are creatures of statute formed in
accordance with the Limited Liability Company Act (“LLC Act”). See Maryland Code
Ann. (1992, 2014 Repl. Vol.), §§ 4A-101–1303 of the Corporations and Associations
Article (“Corps. & Ass’ns”). The LLC Act was enacted to “give the maximum effect to
the principles of freedom of contract and to the enforceability of operating agreements.”
Id. § 4A-102(a). To form an LLC, parties must execute articles of organization and place
them on file with the relevant Maryland department. Id. § 4A-202(a). In practice, LLCs
are governed by an operating agreement adopted by the members that specifies, inter alia,
how the LLC shall be “managed, controlled, and operated”; how profits and losses are to
be shared; rights of assignment; procedures for admission and dissociation of members;
and meeting and voting procedures. Id. § 4A-402(a)(1)–(8).
16
The owners of an LLC are known as “members.” Id. § 4A-101(m). Individuals can
become members of an LLC only in the manner specified in the operating agreement or in
Corps. & Ass’ns § 4A-601. In general, LLCs are either “member-managed”—meaning
that the members retain active management duties—or “manager-managed”—meaning
that the members delegate management authority to a manager or group of managers who
are employees of the LLC. Unlike a partnership, no LLC member “shall be personally
liable for the obligations of the [LLC], whether arising in contract, tort or otherwise, solely
by reason of being a member” of the LLC. Id. § 4A-301.
A partnership is another form of business association, defined as “the
unincorporated association of two or more persons to carry on as co-owners a business for
profit . . . .” Id. § 9A-202(a). The provisions of the Maryland Revised Uniform
Partnership Act (“RUPA”) govern partnerships, unless these provisions are displaced in
accordance with the title—typically through a written partnership agreement. See id. § 9A-
104(a). Unlike LLCs, there are no formal requirements for the establishment of a
partnership, as they can result whether the individuals expressly “intend[ed] to form a
partnership and whether or not the association is called ‘partnership,’ ‘joint venture,’ or
any other name.” Id. § 9A-202(a). Still, an “unincorporated association or entity created
under a law other than” RUPA or another state’s partnership law “is not a partnership.” Id.
§ 9A-202(c).
In the absence of formal agreement, “the existence of a partnership depends on the
intent of the purported partners.” Christine Hurt, D. Gordon Smith, Alan R. Bromberg &
Larry E. Ribstein, Bromberg & Ribstein on Partnership § 2.04[A], at 2-29 (2d ed. 2019).
17
“As between the parties[,] partnership is a matter of intention[,] to be proved by their
express agreement or inferred from their acts and conduct.” Morgart v. Smouse, 103 Md.
463, 468 (1906). See also Garner v. Garner, 31 Md. App. 641, 647 (1976) (“A partnership
inter sese cannot exist against the consent and intention of the parties, and their intention
must be gleaned from proof in the case.”) (citation omitted); Queen v. Schultz, 747 F.3d
879, 887 (D.C. Cir. 2014) (“Whether a partnership exists is an issue of fact, turning less on
the presence or absence of legal essentials than on the intent of the parties gathered from
their agreement, conduct, and the circumstances surrounding their transactions.”) (citation
omitted). Again, “[t]he existence of a partnership will not be presumed, but must be
proved, with the burden of proving such existence resting upon the party having the
affirmative of that issue,” Miller, 225 Md. at 55 (internal citations omitted)—here, that
means Harry. The evidence demonstrating partnership must “rise above surmise or
speculation and reach the level of reasonable probability.” Geo. Bert. Cropper, 284 Md.
at 623 (citations omitted).
The Court of Special Appeals, in Garner v. Garner, 31 Md. App. at 648–49,
approvingly quoted the trial court stating “a partnership, like any other contract, requires
mutuality, a meeting of the minds and agreement, and it requires definite terms and specific
intent among other things . . . .” Such an agreement, however, need not be written. See id.
at 647. To determine whether a partnership was formed we observe the following rules:
(1) joint tenancy or ownership of property “does not by itself establish a partnership”; (2)
sharing “gross returns does not by itself establish a partnership, even if the persons sharing
them have a joint or common right or interest” in the property generating the returns; and
18
(3) any person receiving “a share of the profits of a business is presumed to be a partner,”
unless such share is received in the payment of debt, wages or services rendered, rent,
annuity or benefit, interest on a loan, or sale of a business or property. Corps. & Ass’ns
§ 9A-202(d)(1)–(3).
Harry, Joel, and Mark’s Intent to Form a Partnership
The trial court concluded that there was no enforceable written agreement and the
parties do not challenge that determination here. Thus, we must decide, given the entirety
of evidence produced at trial, whether there was competent material evidence for the trier
of fact to fairly conclude that the parties formed a general partnership, according to Corps.
& Ass’ns § 9A-202(a). As discussed above, this question is one of either overtly expressed
intent, or actions that courts deem sufficient to establish such intent.
As a general matter, Joel and Mark argue that the trial court’s ruling conflates two
distinct forms of business entities: LLCs and partnerships. They state that the court erred
in ruling that a lawfully formed LLC could simultaneously be the vehicle for operating a
separate unnamed “combined mortgage lending business” partnership. In other words,
they maintain that the court ignored the statutory language preventing organizations formed
under other statutes from being partnerships, as provided in Corps. & Ass’ns § 9A-202(c),
and treated MAS as a partnership. Harry responds that, under the trial court’s ruling, “MAS
was neither a partner nor the partnership.” Thus, Harry states, Joel and Mark’s argument
“is based entirely upon [a] false premise.”
While we agree with Joel and Mark that an LLC, itself, cannot simultaneously be a
partnership, we also agree with Harry that it is not the overarching issue here. It is possible
19
to construct a circumstance in which the existence of a partnership10 and an LLC are not
mutually exclusive phenomena. Most relevant here, one could imagine a scenario where
parties intend to become members of an existing LLC but abandon that attempt in favor of
a partnership. It is also not inconsistent with the statutory language, per se, for an
association conducting its operations in conjunction with an LLC to intend to form a
partnership. The question is whether the parties have done so in this case, and, accordingly,
we turn to a close analysis of the record.
Negotiations to Form an LLC
Joel and Mark point to Ramone v. Lang, No. Civ.A. 1592-N, 2006 WL 905347 (Del.
Ch. Apr. 3, 2006),11 and various other out-of-state cases, to illustrate their contention that
parties should not be considered as having formed a partnership during ongoing
negotiations to form an LLC. They state that “the parties were always working toward
amending the 2004 Operating Agreement so that Harry, Mark, and Joel would eventually
10
Unlike the Court of Special Appeals, we use the term “partnership,” rather than
“joint venture,” because that was the term predominately used by the trial court. Moreover,
“there is no real distinction between a joint adventure and what is termed a partnership for
a single transaction.” Beard v. Beard, 185 Md. 178, 185 (1945) (cleaned up).
11
Pursuant to Maryland Rule 1-104(a), we do not rely on unreported opinions from
Maryland courts as “precedent within the rule of stare decisis [or] persuasive authority.”
But when appraising the persuasive value of unreported opinions from other jurisdictions,
we consider the value of these opinions in their local courts. In Delaware, unreported cases
have precedential value and are citable without limitation. See Del. Sup. Ct. Rule
14(b)(vi)(B)(2). We consider this case as persuasive authority, bolstered by that fact that
this Court frequently looks to Delaware cases in search of widely-regarded corporate legal
jurisprudence. See Shenker v. Laureate Educ., Inc., 411 Md. 317, 338 n.14 (2009) (“This
Court has noted the ‘respect properly accorded Delaware decisions on corporate law’
ordinarily in our jurisprudence.”) (citation omitted).
20
become members of MAS . . . .” Thus, no partnership intent could have formed. Harry
asserts that Ramone is inapplicable to the present case because the current parties “agreed
to the material terms of their agreement and never had the stated intent to form their own
LLC when they formed their partnership.”
In 2006, then-Vice Chancellor Leo Strine, current-Chief Justice of the Delaware
Supreme Court and noted corporate law scholar, authored Ramone v. Lang for the Court of
Chancery of Delaware. In that case, two parties, Ramone and Lang, entered into
discussions about their mutual interest in purchasing and operating a swimming center.
See id. at *3. Ultimately, their discussions centered around the formation of an LLC and
resulted in the circulation of a draft LLC agreement. See id. During these negotiations,
the parties referred to each other as “partners,” but, in the end, they were unable to come
to agreement and Lang entered into an LLC agreement with other individuals to acquire
the property. See id. at *9. Ramone filed suit claiming that the parties, through their
conduct during negotiations, had formed a partnership and that he was entitled to a 50%
interest in the property. See id.
The Court concluded that that there was no partnership between the parties in that
case because “to find that their failure to reach accord on an LLC agreement, without more,
left them as general partners would be inequitable and unprincipled, given the reality that
they never agreed on their obligations to one another.” Id. at *13. Rather, the parties’
agreement was merely an engagement “to get engaged,” which is not sufficient to form a
general partnership. See id. at *12–13. Indeed, the Court opined that “it would be very
odd to find that a general partnership existed because both Ramone and Lang seem to have
21
agreed that any binding relationship they would form as co-fiduciaries (rather than as lessor
and lessee) would be as fellow members of an LLC.” Id. at *13. “[W]hen parties clearly
intend to effect a formal business relationship through a written [LLC] agreement rather
than through a general partnership, that reality serves as an important factor that cuts
against concluding that they had earlier formed a general partnership because their attempt
to forge an agreement on the material terms of a written LLC contract eventually came to
naught.” Id.
The advent of the LLC as a business entity—part partnership and part corporation—
surely introduces some ambiguity into our interpretive process. Nevertheless, courts have
grappled with this issue and several have determined that it would be inequitable to
construe arms-length negotiations between sophisticated parties to form an LLC
concurrently as intent to form a partnership when those negotiations fail. See Grunstein v.
Silva, C.A. No. 3932-VCN, 2011 WL 378782, at *10 (Del. Ch. Jan. 31, 2011) (typically,
“a clear intention to form an entity other than a general partnership may strongly suggest
that the parties did not earlier form a partnership”); Hurt, Bromberg & Ribstein on
Partnership § 2.04[B], at 2-40 n.19 (listing Ramone v. Lang and other cases). Cf. Garner,
31 Md. App. at 644 (parties intended to form a partnership but could not be considered to
have done so until the agreed upon circumstances had occurred).
Here, we see the same principle at play as in the cases above. During their first
meeting together on October 13, 2009, Harry, Joel, and Mark laid the foundation for a plan
that would result in each obtaining membership in MAS. Their goal to each obtain one-
third interest in MAS remained consistent throughout their negotiations. Indeed, the parties
22
engaged in active negotiations regarding the Interim Agreement and the Operating
Agreement Outline throughout their relationship. Their attorney circulated various
versions for feedback beginning in October 2009 and ending in April 2010. It appears
initially that Ken’s attorney held up the signing of the agreements due to issues concerning
Ken’s profit distribution. But, after May 2010, it seems that it was a combination of
anticipated financial woes and Harry’s unwillingness to indemnify the warehouse lines that
slowed negotiations. Still, the parties continued to negotiate. From July to December
2010, the parties discussed alternative arrangements for Harry’s ownership, given his
unwillingness to co-sign warehouse line guarantees. In December 2010, the parties stated
that they hoped to have the Interim Agreement signed by the end of the year. In January
2011, the parties again disagreed about another warehouse credit line, delaying any
potential deal. Around this time, Harry also began missing significant amounts of work
due to his mental health, culminating in his resignation in March 2011.12
Harry makes much of the fact that MAS Associates, LLC already existed, but we
see no reason why the circulation of a new LLC operating agreement should be treated as
legally distinct from the circulation of an amended operating agreement. Both strongly
evidence the parties’ intent to acquire ownership of an LLC, not form a partnership. Harry,
Joel, and Mark sought to come to an agreement that would make them all members of
12
Though long, the timeline of the negotiations was anticipated by the parties.
Based on the testimony adduced at trial, the parties contemplated that the pre-membership
interim period could reasonably last for three years. This is supported by the parties’
testimony and the fact that the Interim Agreement included an expiration date of November
30, 2012, three years after negotiations started.
23
MAS. In the meantime, they looked to form an Interim Agreement to regulate their
conduct. As discussed at length below, this agreement contemplated Harry and Joel as
being employees of MAS, not partners in a partnership operating through MAS. Harry
never performed the conditions precedent necessary for his membership in MAS because
he resigned before the agreement was complete. Nor did the parties ever agree to terminate
their pursuit of membership. The parties’ intent controls in such circumstances, and so
long as their intent is to negotiate membership in an LLC, it cannot simultaneously be to
form a partnership.
The most important factor in the present case is that the parties never abandoned
their efforts to become members of MAS. Like in Ramone, “to find that their failure to
reach accord on an LLC agreement, without more, left them as general partners would be
inequitable and unprincipled . . . .” 2006 WL 905347, at *13. All evidence must be viewed
under the shadow of the least ambiguous evidence presented to the trial court: the parties
clearly expressed an unabandoned intent to become members of an LLC. Actions
consistent with this mutual understanding cannot fairly contribute to an implied
partnership.
Management and Control
One factor courts commonly look at to evaluate partnership intent is the
management and control of the entity. See Hurt, Bromberg & Ribstein on Partnership
§ 2.06[C], at 2-81. Joel and Mark state that the parties’ roles were consistent with being
managers in a manager-managed LLC. They argue that referring to each other as partners,
in the colloquial sense, is not indicative of partnership. Additionally, they assert that MAS
24
was the only entity through which the parties operated, as demonstrated by the fact that the
purported partnership was never named, and consequently holds no licenses or bank
accounts. Harry, of course, disagrees with these assertions. He states that the parties made
decisions only after consulting each other and each had equal control in the management
process. Harry points out that the parties were all signatories on the Equity Mortgage
Lending bank accounts and referred to each other as partners, and employees referred to
them as partners, to support his argument.
The trial court partially based its partnership conclusion on its finding that “each
[party] maintained equal control over their business. No one made a decision without
everybody else agreeing to it.” Additionally, the court relied on its observation that Saralee
was not involved in MAS’s day-to-day operations and concluded that she “abandoned all
control” of the company. As an initial matter, we reject the trial court’s use of Saralee’s
non-existent management authority as a factor in favor of inferring partnership because
such a conclusion is contrary to the express terms of the LLC Act and the 2004 Operating
Agreement. Under the LLC Act, members can specify their intended LLC management
structure in the operating agreement. See Corps. & Ass’ns § 4A-402(a). Section 4.1 of the
2004 Operating Agreement provides that “[n]o Member may take part in, or interfere in
any manner, with the management, conduct or control of the business of the
Company . . . .” MAS was a manager-managed LLC and Saralee had no obligation to be
involved in the day-to-day operations of the company—in fact, she had an obligation to
the contrary. Acting in accordance with the operating agreement cannot be used to support
25
intent to form a partnership, and the trial court’s conclusion that Saralee’s actions were
“wholly inconsistent with that of [an] owner[]” is incorrect as a matter of law.
Indeed, the parties did make joint business decisions together, including:
communicating to the employees together, setting company policy, making hiring and
firing decisions, and making decisions regarding salary and bonuses for specific
employees. This is also evidenced by the numerous emails containing “agendas” for their
meetings together. Still, while equal control over the operations of an entity might be one
sign of partnership, it is not determinative in and of itself. This sort of behavior is equally
consistent with the typical high-level managerial duties of an LLC manager. As discussed
above, Harry, Joel, and Mark were actively engaged in negotiations to become members
of MAS—first becoming managers in accordance with the Interim Agreement. None of
the above-listed actions are inconsistent with this expressed intent and, therefore, do not
support a finding of an intent to form a partnership.
Nor does the use of words like “partner” or “owner” magically transform a given
association into a partnership. See Garner, 31 Md. App. at 645 (parties’ descriptions of
their relationship as partners is more relevant to their relationship to third parties than their
relationship between themselves). While these terms may give some sense of the parties’
understanding about their relationship, here it is almost exclusively Harry who uses the
word partner and we have little evidence, beyond silent acquiescence, that Joel and Mark
referred to their relationship this way.13 For these statements to be meaningful, there should
13
There are two occasions for which we have evidence that Mark and Joel used the
word “partner.” In a September 2009 email, before Mark joined the negotiations, Joel used
26
be some consistent mutual expression of partnership, rather than unilateral declarations or
informal uses of the word. Sewing v. Bowman, 371 S.W.3d 321, 334 (Tex. App. Ct. 2012)
(requiring that “there must be evidence that both parties expressed their intent to be
partners”) (citation omitted). The record does not contain sufficient evidence of such a
mutual understanding. Moreover, we recognize the now-frequent colloquial use of the
term “partner,” unconnected to any legal meaning or intention.14 Courts must be
particularly wary of relying on this single word to inform our conclusions about the nature
of a legal entity, when that word is used in common vernacular to refer to friends,
colleagues, and cowboys, alike.
More significant than a colloquial use of the word partner is that the business
licenses remained under the name of MAS Associates, LLC, and not a separate partnership
entity, or the parties themselves. See F & K Supply, Inc. v. Willowbrook Dev. Co., 304
A.D.2d 918, 920 (N.Y. App. Div. 2003) (fact that parties filed business certificate
the word partner to reference Harry. Additionally, Mark used the word partner in a
November 2009 email. These two instances are insignificant in our view.
14
“Referring to a friend, employee, spouse, teammate, or fishing companion as a
‘partner’ in a colloquial sense is not legally sufficient evidence of expression of intent to
form a business partnership.” Ingram v. Deere, 288 S.W.3d 886, 900 (Tex. 2009) (citation
omitted). See also Hoss v. Alardin, 338 S.W.3d 635, 645 (Tex. App. 2011)
[T]here was no evidence that using the word “partner” in the
context of customer introductions like Alardin described would
ordinarily be understood to have legal significance. Thus, we
conclude that Alardin’s evidence that he introduced Hoss to
customers as his “partner,” absent evidence to explain why the
context of those introductions showed that the term carried
legal significance, is no evidence of the second TRPA factor.
27
indicating the entity was a sole proprietorship was evidence against partnership). Not only
were the parties not named in the business licenses, they actively surrendered their
individual licenses. Additionally, the mere act of doing business as Equity Mortgage
Lending, a registered tradename of MAS Associates, LLC, is evidence against the
formation of a partnership. The parties openly promoted themselves to lenders and others
as being part of MAS and Harry took no issue with doing so when he edited the “history”
section of a MAS document they were using to secure credit lines. None of the parties
protested holding out to the world that they were an LLC, and willingly operated under the
rules of such an entity. Both of the above facts provide significant evidence that the parties
did not intend to form a partnership separate from MAS.
Finally, it is a point of contention between the parties whether they indeed “opened”
the Bank of America accounts, or were simply added as signatories. The trial court
concluded that Saralee and Ken were not “authorized to sign” for the new accounts, but the
evidence does not support this conclusion. In fact, the cover letter attached to the bank
paperwork indicates the opposite—that Saralee opened the accounts and “authorize[d]” the
parties “to be signers” on the MAS d/b/a Equity Mortgage Lending accounts. Even if
Saralee and Ken—as members in a manager-managed LLC—were not authorized to draw
from the accounts, we are hard-pressed to see how such an arrangement is indicative of
“abandonment” by a member. And given the terms of the 2004 Operating Agreement, we
conclude that it should not be.
Together, the evidence relied on by the trial court fails to tilt the scale from
management duties to something suggestive of partnership. When the parties at issue are
28
also actively engaged in the process of negotiating to become members of an LLC,
evidence of equal control and joint decision-making authority is not evidence of the parties’
intent to form a partnership. Harry’s mere claim of partnership is not a sufficient
foundation for the trial court to find same.
Capital Contributions to the Entity
Another common factor courts use to determine whether parties intended to form a
partnership is whether they made capital contributions to the endeavor. See Hurt,
Bromberg & Ribstein on Partnership § 2.04[B], at 2.34. “[A] contribution to capital is
generally understood to be a more permanent contribution to the partnership than a debt
contribution, so that the capital contributor participates in the risks of the enterprise to a
somewhat greater extent than does a creditor.” Id. § 2.06[E], at 2-98. The trial court
concluded that neither Saralee nor Ken “made any capital contributions,” and that, while
the parties may have termed the payments “loans,” Harry, Joel, and Mark made “capital
contributions for purposes of funding a new venture . . . .”
Harry uses his contributions of capital to argue that he is an “equal owner” of the
entity formed with Joel and Mark. Both he, and the Court of Special Appeals, point to a
quote from Southern Can Co. v. Sayler, 152 Md. 303 (1927), in which this Court quotes an
old treatise distinguishing a loan and a capital contribution.
Care must therefore be taken to discriminate between the cases
of an alleged loan, with a share of the profits by way of interest,
and a real partnership disguised as a loan; for if it appears that
the transaction is a mere device to obtain the advantages of
a partnership, without the responsibilities, it will be held to
be a partnership, whatever the parties may have called it. The
interest is usually to be found, according to later cases, in the
29
powers of control of the alleged lender: Has he any voice or
part in controlling the management of the business as a
principal therein? Has he, by virtue of the arrangement, such
an interest in the business that he can be regarded both as
principal and agent for the others?
Id. at 320 (emphasis added). We are unconvinced by this language. Specifically, it is
unclear what “advantages of a partnership” the parties would have been intending to gain
when they characterized Harry’s contribution as a loan. Rather, they were taking advantage
of the LLC form when they did so, benefiting from its added liability protection and tax
treatment—a business form that did not exist in 1927, when Southern Can Co. was decided.
Understanding the form of the payments at issue is essential to evaluating their
classification as either loans or capital contributions. The alleged partners did not make
three separate payments directly into a partnership account, or even directly to MAS.
Instead, in late-November 2009, both Harry and Joel issued checks to “Saralee Greenberg”
in the amount of $150,000 per person. Saralee then contributed $450,000 to MAS,
including Mark’s share. Again, in late-December 2010, Harry and Joel wrote $125,000
checks to Saralee, who, in turn, made a $250,000 contribution to MAS to increase its equity
to over $1,000,000. The trial judge, considering the above evidence, concluded that even
if the payment “was called a loan, . . . it was a capital contribution for purposes of funding
a new venture . . . .” (Emphasis added.) This cannot be correct.
The form of the transactions belies the conclusion that the parties made capital
contributions to a new entity. It is uncontroverted that the payments were made to Saralee,
a MAS member, who then transferred them to MAS. This procedure is consistent with
MAS’s 2004 Operating Agreement, which requires capital contributions be made through
30
a member. Such an arrangement would only have been necessary if the parties intended
to contribute capital to MAS, not to some new venture. Two conclusions are inescapable.
First, this action is consistent with Harry, Joel, and Mark’s expressed intention to become
LLC members—a goal they were actively working toward at the time of the payments.
These circumstances support a conclusion that the payments were made by expectant MAS
members, to a current member, for the purposes of that member making a capital
contribution to MAS.
More importantly, to treat Harry, Joel, and Mark’s payments as capital contributions
made through Saralee and MAS to their alleged partnership would be to impermissibly blur
the lines between LLCs and partnerships in contravention of RUPA’s express terms. Under
RUPA, codified in Corps. & Ass’ns § 9A-202(c), “[a]n unincorporated association or entity
created under a law other than [RUPA, former-UPA, or another state’s partnership statute]
is not a partnership.” Thus, an LLC cannot simultaneously be a partnership, because it is
formed in accordance with the formalities outlined in the LLC Act. The alleged capital
contributions were made by Saralee, an LLC member, to “MAS Associates, LLC,” not to
a purported partnership. The trial judge treated these payments as if they were made to a
partnership under the guise of capital contributions to an LLC. But to accept this
conclusion would be to treat a capital contribution to an LLC as a capital contribution to a
partnership—as if the entities were one-in-the-same—which is expressly prohibited by
31
Corps. & Ass’ns § 9A-202(c). The court made an error of law when it concluded this was
possible.15
In sum, the trial court erred as a matter of law when it characterized capital
contributions to MAS as capital contributions to an unnamed partnership. Such a
conclusion is only possible if the LLC and partnership are considered the same entity, in
contravention of Corps. & Ass’ns § 9A-202(c). Thus, the evidence and law necessitate a
finding that Harry, Joel, and Mark’s payments were loans to Saralee, not capital
contributions to an alleged new entity. A loan is not evidence of partnership intent.
Sharing of Profits and Losses
Joel and Mark argue that any profits Harry received should be characterized as
wages because “Harry was considered an employee of MAS Associates, LLC and received
a W-2 form showing his wages.” The evidence, they assert, is merely consistent with MAS
being a manager-managed LLC and Harry being a manager. Moreover, they testified that
the parties never agreed to share losses equally and that the evidence demonstrates Harry’s
15
We also consider Harry’s own subjective understanding of the nature of the
$275,000 in payments he made to Saralee. Both of Harry’s checks contain the word “loan”
in the memo line and they are both addressed to Saralee, not MAS or a partnership entity.
Additionally, Harry’s emails and testimony characterize the payments as loans and request
prompt repayment—within 30 days of sending the money. The short-term nature of the
contribution belies its characterization as a capital contribution. The parties also drafted
promissory notes for both loans that were to govern repayment, although neither note was
ever signed. On other occasions, Harry had made short-term loans to MAS, confirmed via
email, to MAS. Some of these loans were repaid on December 22, 2010, the same day
Harry made another $125,000 payment to increase MAS equity to over $1,000,000.
Moreover, Harry, a sophisticated operator in the world of mortgage lending, would be able
to identify a loan when he saw one. The evidence clearly establishes Harry’s subjective
understanding that the separate $150,000 and $125,000 transactions were loans, contrary
to the trial court’s conclusion.
32
unwillingness to share MAS’s liabilities equally. Harry, on the other hand, states that he
received a share of profits, not wages, and, therefore, RUPA presumes him to be a partner.
He claims that the parties took “draws” on profits in the amount of $10,000 per month and
shared profits, though not commissions, equally. The fact that he was paid in W-2 wages,
states Harry, does not make the payments employment wages.
The trial court concluded that Harry, Joel, and Mark shared profits equally. In total,
Harry received $325,552 in wages from MAS in 2010, as reported on his W-2 form and in
his Form 1040 tax filing. This amount included the twelve $5,000 twice-monthly
payments, $81,052 in commissions, a December 15 payment of $120,000, and a December
30 payment of $64,500. Although it is unclear precisely which portion of his salary the
court determined to be “profit,” it likely based this conclusion on the latter two payments:
the $120,000 payment made to all three parties and the $64,500 payment made only to
Harry and Joel. Harry claimed that the $64,500 payment was made to Saralee in lieu of
Mark, but “it came up a little bit short.” Saralee indeed received a $58,695 check on
January 13, 2011 with “Year End Distribution” in the memo line.
Again, Corps. & Ass’ns § 202(d)(3) states that a “person who receives a share of
the profits of a business is presumed to be a partner in the business,” unless the profits can
be alternatively characterized. One of those alternative characterizations is as payment for
“services rendered as an independent contractor or of wages or other compensation to an
employee[.]” Corps. & Ass’ns § 9A-202(d)(3)(ii) (emphasis added).
Harry failed to establish that the $5,000 twice-monthly payments should be
considered profit sharing, rather than a salary, which can be a share of gross revenue,
33
referred to as “gross returns” in Corps. & Ass’ns § 9A-202(d)(2).16 In Ingram v. Deere,
288 S.W.3d 886, 898–99 (Tex. 2009), the Supreme Court of Texas drew a distinction
between the two terms. To support its characterization of payments as coming from gross
revenue, as opposed to profits, the Court noted that “there [was] no evidence that Deere’s
share would have decreased if expenses grew or increased if expenses shrank.” Id. at 899.
Thus, the payments were more like normal salary and less like shares of profit. Likewise,
from July through December 2010, Harry, Joel, and Mark received twice-monthly $5,000
payments, notwithstanding the fluctuation in profits during that time. Additionally, these
payments were made regularly and denoted as “salary” on MAS’s payroll journal. These
payments were compensation and do not contribute to any presumption of partnership.
Moreover, the evidence is overwhelming that the parties intended to become
employees of MAS during the interim period before membership, and such an arrangement
weighs heavily against a presumption of partnership. Even as of the first meeting between
the parties, as evidenced by the meeting summary prepared by neutral attorneys, they
contemplated Harry and Joel becoming MAS employees during the period before they
were to become members. The initial meeting summary specifically stated that Harry and
Joel were “entitled to receive W-2 compensation equal to 1/3 of the profits of the
‘origination division’ of the Company”—essentially what the parties ultimately received.
The Interim Agreement, drafted after this meeting, contained nearly identical terms. While
16
Profit is the “excess of revenues over expenditures in a business transaction.”
Profit, Black’s Law Dictionary (11th ed. 2019). Whereas revenue is the total “income from
any and all sources.” Revenue, Black’s Law Dictionary (11th ed. 2019).
34
these documents were not binding, they evidence the parties’ thinking and intent. Joel,
Mark, and Cowan each testified that the employment relationship was to provide the parties
with protection against Harry’s creditors and to give the group time to change over
licensures and begin to make money. Joel also described himself as an “employee of MAS
Associates” at all times during the negotiations and during his testimony.
Harry points to no other documents to support a determination that he and Joel were
partners in a partnership, and not MAS employees who were managers. Nor do we find
any. Rather, the documentary evidence supports the opposite conclusion. The paperwork
filed with Bank of America authorizing Harry, Joel, and Mark to be signatories on the
Equity Mortgage Lending accounts describes Mark as the President of MAS and Harry and
Joel as the Vice Presidents. A November 2010 Consumer Bank warehouse credit line
application also lists Mark as the CEO of MAS and Harry and Joel as managers of the
company. Moreover, Harry was listed as a “Manager” of MAS Associates, LLC in the
Nationwide Licensing System Consumer Access database. Significantly, he is also
correctly described as the previous “President and Managing Member” of Savings First in
the same document. The above evidence severely undercuts the trial court’s determination
that the parties ever intended that Harry and Joel be anything but employees during the
interim period.
Most importantly, both MAS and Harry, Joel, and Mark treated all payments as
wages, not profits. First, all payments were part of MAS’s wage calculation on the W-2s
sent to Harry, Joel, and Mark, which included all withholdings typical of wage payments.
Each party also reported the payments as part of their wages on their Form 1040 tax returns
35
in 2010, and none of the men filed a K-1 schedule reporting any profits from MAS. On
MAS’s payroll system, the payments were classified as “commission,” and on November
22, 2010, Mark and his attorney referred to the payments as “bonuses.” Executive
compensation packages often include a percentage of profits, and, in fact, such an
arrangement was contemplated in the Interim Agreement, which states that the parties are
“entitled to receive W-2 compensation equal to 1/3 of the profits of the ‘origination
division’ of the Company.” According to MAS’s 2010 tax returns, the LLC made $160,234
in income, meaning that not all of the “profits” were distributed to the alleged partners.
Moreover, Saralee reported receiving $145,813 in profits from MAS Associates, LLC on
her K-1 schedule—exactly 91% of MAS’s profit. In short, both MAS and the parties
treated their income as wages, not profits, in line with the written contemplations of the
parties during their negotiations to become LLC members. Receipt of wages does not
support a finding of partnership.
Additionally, Harry never intended to be equally liable for the debts of the purported
partnership, as demonstrated by his resistance to being held jointly and severally liable for
loans. Harry’s insistence on capping his liability at one-third is inconsistent with a general
partnership structure, in which, except in limited circumstances, “all partners are liable
jointly and severally for all obligations of the partnership.” See Corps. & Ass’ns § 9A-
306(a) (emphasis added). Parties can change this structure by agreement as it relates to the
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partners—i.e., substituting a one-third indemnity for joint and several liability17—but they
never reached such an agreement. Harry both refused to co-sign the warehouse line along
with the other parties—as well as rejecting other similar agreements—and never signed an
indemnity agreement covering his share of the liabilities from that line, or any other.
In sum, while there is some competing testimony as to the nature of these payments,
the post hoc perception of the parties as to whether the payments should be now
characterized as profits or wages carries precious little weight. This is especially true when
considered in light of the abundant documentary evidence demonstrating that all payments
to the parties were treated as wages. To the extent that the trial judge applied any
presumption of partnership, it was an error of law to do so, because the payments were
“wages or other compensation to an employee,” according to Corps. & Ass’ns § 9A-
202(d)(3)(ii). Without such a presumption, the mere receipt of compensation tied to profits
is not indicative of partnership, nor does it demonstrate “co-owner[ship],” under Corps. &
Ass’ns § 4A-202(a). There is such meager evidence in support of the notion that these
payments were shares of profits that the trial court’s conclusion otherwise was clearly
erroneous—especially when considered in light of the parties’ ongoing efforts to become
members of the LLC.
17
This is possible, so long as the agreement does not “[r]estrict the rights of third
parties,” in violation of Maryland Code Ann. (1997, 2014 Repl. Vol.), § 9A-103(b)(10) of
the Corporations and Associations Article.
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CONCLUSION
Harry had the burden of producing sufficient facts to conclusively demonstrate the
parties’ intent to form a partnership. See Miller, 225 Md. at 55. Evidence of equal control
and joint decision-making authority, under these circumstances, does not support a
conclusion of partnership. Further, the trial court erred as a matter of law when it classified
Harry’s $275,000 in payments to Saralee as capital contributions, as opposed to loans. Nor
can the wages the parties received be considered profits, here. First, any presumption of
partnership based on profit sharing is undone by the parties’ expressed, simultaneous, and
unabandoned intent to become members of MAS and their treatment of the payments as
wages. Payments classified as wages are not supportive of partnership. Moreover, Harry
actively resisted being held jointly and severally liable for the debts of the purported
partnership. For these reasons, even reviewed in the light most favorable to Harry, the
record still lacks the necessary competent material evidence to conclude that the parties
intended to form a partnership.
Thus, we hold that the trial court’s finding to the contrary was clearly erroneous,
and reverse and remand to the Court of Special Appeals, with instructions to remand to the
Circuit Court for Baltimore County to adjust the damage award in a manner consistent with
this Opinion.
JUDGMENT OF THE COURT OF
SPECIAL APPEALS REVERSED AS TO
FINDING OF PARTNERSHIP. CASE
REMANDED TO THAT COURT WITH
INSTRUCTIONS TO REVERSE THE
JUDGMENT OF THE CIRCUIT COURT
FOR BALTIMORE COUNTY AND
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REMAND TO THE CIRCUIT COURT
FOR FURTHER PROCEEDINGS,
CONSISTENT WITH THIS OPINION.
COSTS TO BE PAID BY RESPONDENT.
39