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Bontempo v. Lare

Court of Special Appeals of Maryland

April 30, 2014


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Appeal from the Circuit Court for Howard County, Diane O. Leasure, Judge.


Argued by: Geoffrey H. Genth (Catherine M. Manofsky, Kramon & Graham, PA on the brief) all of Baltimore, MD for Appellant.

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

Panel: Eyler, Deborah S., Wright, Nazarian, JJ.[1]


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[217 Md.App. 89] Nazarian, J.

Table of Contents


A. A Promising Start

B. Growing Revenue And Growing Perks

C. The Relationship Sours And Unravels

D. The Aftermath

E. The Litigation

1. Pleadings

2. The Trial Court's Initial Findings

a. Count I

b. Count II

c. Counts III and IV

d. Count V

3. The Trial Court's Subsequent Findings Pursuant

To The Parties' Post-Trial Motions

a. The Motions To Alter Or Amend The Judgment

b. The May 8, 2012 Post-Trial Order

c. The May 22, 2012 Supplemental Memorandum Opinion

4. The Final Tally


A. Rights, Duties, And Litigation In

Closely Held Corporations.

B. The Circuit Court Did Not Abuse

Its Discretion In Crafting Alternative

Equitable Relief For Count I, The Dissolution Claim

1. The Shareholders' Agreement Defines

The Parties' Rights And The

Range Of Appropriate Remedies

2. The Circuit Court Did Not Err In

Granting Summary Judgment For The

Lares In Their Personal Capacity

C. The Damages Awarded Under Count

III Did Not Make Quotient Whole

1. The Lares Breached Duties, But

Did Not Remedy The Breach

2. The Circuit Court Did Not Err In

Declining To Find Fraud Or Impose

Punitive Damages

3. On Remand, The Circuit Court Must

Reconsider The Attorneys' Fees Award

D. Count V: Mr. Bontempo's Equal

Compensation Claim

[217 Md.App. 90] Like marriages, business relationships sometimes fail, and the process of disentanglement can be messy and painful. The relationship in this case revolves around an information technology company called Quotient, Inc. (" Quotient" ) that was owned by long-time business associates Clark Lare (and his wife, Jodi) and David Bontempo. Like a new romantic relationship, the business flourished in its early stages. Like some marriages, the relationship between Mr. Lare and Mr. Bontempo eventually became strained, then unraveled. And not unlike those marriages that end up in the courts, the parties could not agree on how to distribute their respective assets and manage the company going forward after Quotient terminated Mr. Bontempo's employment in 2008, and Mr. Bontempo brought suit, both individually and on behalf of Quotient, in the Circuit Court for Howard County.

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

[217 Md.App. 91] I. BACKGROUND

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A. A Promising Start

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

Early on, Mr. Lare successfully converted a referral from his former co-worker, David Bontempo, into a contract to provide informational technology services to the United States Census Bureau.[3] Soon after, Mr. Lare hired Mr. Bontempo to work for Quotient and made him a minority shareholder. The parties executed an amendment to the shareholder agreement (the " Shareholder Agreement" ) that gave Mr. Bontempo forty-five percent of Quotient, Mr. Lare four percent, and Ms. Lare fifty-one percent. In exchange, Mr. Bontempo executed a promissory note in the amount of $46,800. Although Mr. Lare [217 Md.App. 92] testified that he expected the note to be repaid, Mr. Bontempo claimed that it existed only for accounting purposes:[4]

[COUNSEL FOR THE LARES:] Now, do you remember that at one point in time though, you did execute a promissory note to pay for that stock?
* * *
[COUNSEL FOR THE LARES:] [Exhibit 7] is a non-negotiable promissory note dated effective March 21, 2001, for forty-six thousand eight hundred dollars, isn't it?
* * *
[COUNSEL FOR THE LARES:] Okay, and ah, that was for the stock that he conveyed to you, isn't it? Wasn't that the purpose?
* * *
[MR. BONTEMPO:] Um, the purpose of this more was for an accounting record, that there was some value transferred to me, and that there was--Clark and I had an agreement, there was no money to be exchanged for this agreement.

The parties never signed a written employment agreement, but they agreed orally

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that Mr. Bontempo would receive an initial salary of $20,000, and he received his first paycheck in February 2000. The Lares, on the other hand, did not draw a salary until December 2001. Mr. Bontempo contended that he and Mr. Lare reached an additional understanding that once the Lares started to draw a salary, he would draw a salary equal to the combined salaries of the Lares:

[COUNSEL FOR THE LARES:] . . . [I]s there a piece of paper anywhere that you have seen in this case that says that there will be equivalent salaries that I, Dave Bontempo, will receive the same amount in salary as the Lares, or [217 Md.App. 93] Clark Lare, the Lares in combination, is there any such agreement that you are aware of?
[MR. BONTEMPO:] No, there is not, on paper, written down. But, we did have an oral agreement.

The Lares disputed that such an agreement ever existed:

[COUNSEL FOR THE LARES:] Ah, did you have discussions during the period of 2000 to 2003 about, ah, whether your salaries should be equal to, or commensurate with Mr. Bontempo?
[MR. LARE:] No, no.

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

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

B. Growing Revenue And Growing Perks

Quotient ultimately qualified for a General Services Administration (" GSA" ) schedule, which meant that the company could submit bids as a prime contractor for federal government contracts, and it quickly secured contracts with a number [217 Md.App. 94] of large public and private organizations.[6] With revenue growing, Quotient moved into office space in Columbia, Maryland in 2001, and has moved several times since to accommodate its continued growth.

In addition to the salaries Quotient paid to Messrs. Lare and Bontempo, the company covered cell phone expenses for both the Bontempos and the Lares. Quotient purchased automobiles for Mr. Bontempo's wife and for Ms. Lare. The Bontempos were issued company credit cards that

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they used for gas, meals, and entertainment. And Quotient paid for Mr. Lare and other Quotient employees to train with a corporate fitness training company, and for the Lares' personal trainers.

In 2006, the Lares also began paying household employees from Quotient's payroll account,[7] using Quotient funds for personal legal fees, and advancing interest-free loans to Watermont and Broadway Equities, LLC (" Broadway" ), a company Mr. Lare formed with his brother to own a beach house in New Jersey. In December 2007, Mr. Lare borrowed $205,586 from Quotient to fund renovations to the Lares' home. This loan originally was to be repaid by March 1, 2009, but on February 1, 2009, Mr. Lare executed a new note in the amount of $497,267.00, with the balance due on January 1, 2016.[8] The Lares eventually agreed that many of these [217 Md.App. 95] expenses should have been treated as additional income, and they filed amended tax returns both for themselves and Quotient for tax years 2006 through 2009.

C. The Relationship Sours And Unravels

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

Bontempo alleges that, in 2007, Lare took a $100,000.00 distribution and asked Bontempo to wait until the end of the year to take his distribution, but then [Lare's] distribution was converted to a loan which obviated the need to make a similar distribution to Bontempo. According to Bontempo, this also happened in 2008. Another source of conflict was the disparity in Bontempo and Lare's salaries in 2008. Bontempo's salary increased to $244,791.73 that year, and Lare's increased to $323,958.46. Bontempo believed that the difference in salary was supposed to be made up to him, but it never was. Bontempo alleges that in 2009, Lare took a distribution without telling Bontempo, and that Bontempo never received his proportionate distribution.

Mr. Lare, on the other hand, attributed the strained relationship to his view that Mr. Bontempo's job performance had lagged:

Lare began to doubt Bontempo's commitment to Quotient in 2007, when Lare's own workload increased. Lare felt that as Quotient grew, more and more work fell on his shoulders and he needed more support from Bontempo, but was not receiving it. He felt that Bontempo was pursuing outside interests, such as his interest in jazz music and other [217 Md.App. 96] commercial ventures with his brother, to the detriment of Quotient.

To " light a fire under" Mr. Bontempo, Mr. Lare lowered his salary by ten percent in

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June 2009.[9] This was not well received.

Another source of tension arose in September 2009, when Mr. Lare rejected Mr. Bontempo's suggestion that Quotient hire John O'Leary, a technology professional with whom Mr. Bontempo was familiar. Mr. Lare contended that Quotient did not have the funds to hire an additional business development employee, although it turns out that he was simultaneously directing Quotient to advance funds to Watermont and Broadway. Mr. Bontempo disagreed with this decision even before learning about Mr. Lare's investment of Quotient funds into the other companies, and the tension grew.

The two men aired their grievances in November 2009. Mr. Lare expressed his concerns about Mr. Bontempo's performance and Mr. Bontempo raised his concerns about Mr. Lare's financial decisions (although he felt that his concerns were " brushed off" ). They met again in January 2010 to discuss salaries and distributions. According to Mr. Bontempo, after he asked Mr. Lare about his 2009 distribution, Mr. Lare responded that " [t]here is no distribution." In response, Mr. Bontempo told Mr. Lare that they needed to work out an exit strategy, and proposed that they split the company. Mr. Lare refused, and instead told Mr. Bontempo to sell back his stock: " You need to sell your stock, Dave. You need to sell it. We need to come up with a price. You need to name a price, and sell it." Mr. Bontempo refused. Shortly thereafter, Mr. Lare presented Mr. Bontempo with a proposal for Mr. Bontempo's departure from Quotient. Mr. Bontempo again refused.

Mr. Lare and Mr. Bontempo held another meeting on March 26, 2010. Mr. Lare handed Mr. Bontempo a separation agreement that Mr. Bontempo refused to sign, then informed [217 Md.App. 97] Mr. Bontempo that his employment was being terminated. Neither Mr. Bontempo nor Quotient's employees were informed that Mr. Bontempo was terminated " for cause," but at trial, Quotient contended, through the testimony of Mr. Lare, that Mr. Bontempo's firing resulted from his poor job performance.

D. The Aftermath

After termination, Mr. Bontempo remained an officer and director of Quotient. On March 29, 2010, while still in those roles, Mr. Bontempo revoked his personal guarantee of Quotient's credit facility with Branch Banking & Trust (" BB& T" ). He claimed that he did this to limit the risk that he and his family would face if Quotient failed and because he thought that Mr. Lare " would just flat-out take [his] distributions." Shortly thereafter, BB& T notified Quotient that its loan was in default as a result of multiple violations of the terms of the loan documents, including Mr. Bontempo's revocation, the filing of this lawsuit, and Quotient's loans to Watermont. Quotient had difficulty obtaining alternative financing, but ultimately entered a new credit facility with Wells Fargo Business Credit on less favorable terms than the original agreement with BB& T; the difference cost the company $85,000 in additional finance charges.

On August 23, 2010, six months after his termination, Mr. Bontempo voluntarily resigned as an officer and director of Quotient. However, he remained (and remains to this day, so far as the record reflects) a shareholder, and he continued to receive distributions totaling $466,044 in 2009, $252,665 in 2010, and $465,000 in 2011.

After his resignation as an officer and director, Mr. and Mrs. Bontempo started a new business, Siloquent LLC. Although

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Mr. Bontempo met with contacts he developed through Quotient and informed them that he was starting a new business, he claimed that he had no intention of soliciting business during those meetings. Because Siloquent did not have a GSA schedule, it struggled to compete with Quotient.

[217 Md.App. 98]E. The Litigation

1. Pleadings

On April 2, 2010, Mr. Bontempo filed his initial complaint against Quotient and the Lares in the Circuit Court for Howard County, which sought relief pursuant to Maryland's corporate dissolution statute, Md. Code (1975, 2007 Repl. Vol), Section 3-413(b)(2) of the Corporations and Associations Article (" CA" ).[10] On August 12, 2010, he amended the complaint to add counts of constructive trust, breach of fiduciary duty, and constructive fraud, and Quotient filed a counterclaim requesting a declaration that Mr. Bontempo was fired for cause, an order that he was accordingly required to sell his stock, and a finding that he breached fiduciary duties he owed to Quotient.[11] Mr. Bontempo amended his complaint again on December 21, 2010, and the trial court's overview of this second amended complaint (which remains the operative complaint and to which we will refer from here on as the " Complaint" ) provides a helpful framework for the disputes before us:

Count I of [the Complaint] seeks relief pursuant to [CA § ] 3-413 . . . . Bontempo requests the following relief:
1) Prompt appointment of a receiver or trustee to take charge of the assets and operate the business of the corporation, as necessary and proper to preserve Quotient's assets, pending a final determination as to potential judicial dissolution of Quotient;
2) An Order reinstating Bontempo as an employee of Quotient and appointing him as an officer of the Court to assist in preservation of Quotient's assets and customer relationships;
[217 Md.App. 99] 3) An Order requiring dissolution of Quotient at a specified future date, to become effective in the event that the stockholders fail to resolve their differences;
4) An Order requiring the Lares to promptly and fully account to Quotient and Bontempo for any and all uses or transfers of Quotient assets to the Lares for their direct or indirect personal benefit;
5) An Injunction to prohibit continuing acts of oppressive conduct and to cease or reduce salary and distribution payments to the Lares;
6) An Order dividing Quotient's assets, including customer accounts, and awarding Bontempo 45% of Quotient's assets to manage independently of the Lares;
7) Damages to Bontempo as compensation for the Lares' illegal, oppressive, and fraudulent conduct;
8) Attorney's fees, including expert's fees, interest, and costs; and
9) Further relief as may be just and appropriate.
In Count II of the [Complaint], Bontempo alleges Constructive Trust against

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the Lares on behalf of Quotient. First, Bontempo requests that a constructive trust be established for any and all monies or property obtained for the benefit of the Lares outside of the auspices of Quotient, that the Lares convey to Quotient any such monies or property, and that Bontempo be awarded expenses for prosecuting this complaint on behalf of Quotient.
In Counts III and IV of the [Complaint], Bontempo alleges Breach of Fiduciary Duty and Constructive Fraud against the Lares on behalf of Quotient. Bontempo requests the same relief for both Counts--that the Lares be directed to pay compensatory damages to Quotient, punitive damages, and Bontempo's expenses for prosecuting the complaint on behalf of Quotient.
Bontempo alleges Breach of Contract in Count V, based on the alleged agreement that his salary would be equivalent to the combined salaries of the Lares and an alleged failure to [217 Md.App. 100] receive his proportionate share of stockholder distributions. Bontempo seeks compensatory damages in the among of $528,000.00 for unpaid salary and $118,000.00 for distributions, as well as punitive damages and attorney's fees.

Before trial, each party filed a motion for partial summary judgment and the court held a motions hearing on March 3, 2011. First, Mr. Bontempo sought summary judgment on the portion of Quotient's counterclaim arguing that Mr. Bontempo breached his fiduciary duties to Quotient by filing this lawsuit in bad faith and by revoking his personal guarantee of Quotient's line of credit with BB& T. The court denied this motion, finding that facts on the issue remained subject to dispute and that Mr. Bontempo was not entitled to judgment as a matter of law. Second, Quotient sought summary judgment on two remedies sought by Mr. Bontempo--his reinstatement as an officer and director of Quotient and dissolution of Quotient. The court denied this motion as well, declining, at that point, to find these remedies unavailable. Finally, the Lares sought summary judgment on Mr. Bontempo's request for employment-based remedies against them personally under CA § 3-413. The court granted this motion, finding employment-based damages from a shareholder impermissible under CA § 3-413 without a clear allegation of fraud on the part of that shareholder.

A nine-day bench trial[12] was held between March 14 and March 31, 2011, during which the parties presented 146 exhibits and the court heard testimony from eighteen witnesses. After trial, the court issued a Memorandum Opinion and Order on September 29, 2011. After timely post-trial motions and further hearings, the court issued three follow-up orders--a Post-Trial Memorandum and Order dated May 8, 2012, a Supplemental Memorandum and Order dated May 22, 2012, and a Clarification Order dated June 13, 2012--that [217 Md.App. 101] made additional findings and altered some of its original decisions.

2. The Trial Court's Initial Findings

In the circuit court's initial order, dated September 29, 2011, the court found in favor of Mr. Bontempo and against Quotient on Count I; in favor of Quotient and against Mr. Bontempo on Count II; in favor of Quotient and against the Lares on Count III; in ...

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