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1st Team Fitness LLC v. Illiano

Court of Special Appeals of Maryland

June 1, 2016

1st TEAM FITNESS, LLC, et al.

          Berger, Reed, Rodowsky, Lawrence F. (Retired, Specially Assigned), JJ.


          Rodowsky, J

         Appellant, 1st Team Fitness, LLC (1st Team) brought this action, directly and derivatively, on behalf of Pozzuoli, LLC (Pozzuoli), against the appellee, Francesco Illiano (Illiano).[1] Each of these parties was a fifty percent member in Pozzuoli. On counts charging intentional misrepresentation-concealment or non-disclosure, constructive fraud, breach of contract and conversion-embezzlement, the Circuit Court for Carroll County, at a bench trial, awarded Pozzuoli, LLC (hereinafter sometimes called the Gym) compensatory damages of $527, 831, of which $263, 915 were awarded directly to 1st Team. Appellant is aggrieved because the circuit court did not award punitive damages or counsel fees or litigation expenses.

         The circuit court also appointed a receiver for Pozzuoli, LLC. By a separate brief, Pozzuoli, through its receiver, joins in requesting a reversal and remand on the punitive damages issue.

         Illiano has cross-appealed and asserts that the circuit court abused its discretion in failing to find a discovery violation by 1st Team, arising out of its allegedly untimely disclosure of the opinion expressed by the accounting expert called by 1st Team at trial.

         For the reasons hereinafter set forth, we shall affirm.

         Background Facts

         Illiano, through BAIA, LLC, owned the premises located at 1311 South Main Street in Mt. Airy. In March 2009, Illiano, through his then solely owned LLC, Pozzuoli, acquired a franchise from SNAP Fitness, Inc. (SNAP Fitness) to operate a SNAP fitness center on the lower level of those premises. The facility opened in September 2009. One Hundred Forty Thousand Dollars in startup costs were loaned to the Gym by Illiano from funds obtained from other business entities that he owned, wholly or partially. The Gym hired a manager and engaged Donald Caparotti (Don) and Diane Caparotti (Diane), who are husband and wife, to be fitness trainers. The Caparottis rendered those services through their LLC, 1st Team. It initially was paid 75% of the training fees with the remaining 25% retained by the Gym.

         The original manager's services, however, proved unsatisfactory and, effective January 1, 2010, the Caparottis and Illiano entered into the agreement that underlies this litigation, namely, the operating agreement for Pozzuoli, LLC by and between Illiano and 1st Team. Its relevant features included:

• Illiano and 1st Team each had 50% interests in the Gym. The operating agreement recited initial cash capital contributions of $100 per member, but those amounts were not actually paid. 1st Team paid no monetary consideration for its 50% interest.
• Don and Diane would manage the fitness center, ordinarily working no less than a combined 50 hours per week, for which they would retain 100% of the personal training fees.
• Illiano would be the managing member. In his sole discretion, he would determine the amount of cash available for distribution.
• Illiano had "full, exclusive and complete discretion, power and authority in operating the [Gym's] business, " including "determin[ing] the accounting methods and procedures of the [Gym]."
• Illiano was to "keep … full and true books of account, in which shall be entered fully and accurately each transaction of the [Gym]."
• The books of account were to be open to inspection by members during regular business hours and were to be available online if the Managing Member maintained the books in a manner allowing that access.
• There was no restriction on members engaging in other businesses and the Gym was unrestricted in dealing with businesses owned by or affiliated with a member.
• Each member had a right of first refusal in the event of a sale of the other member's interest.
• The members agreed that Illiano had loaned $140, 000 to the Gym prior to the date of the Operating Agreement.

         After several months of operations, the Caparottis began fielding complaints from vendors and employees that they had not been paid. Nor was the couple receiving payment for personal training. In April 2010, they first received financials for the Gym and thereafter received them sporadically. None of the reports had supporting details. After repeated requests for a meeting, the Caparottis met with Illiano in early 2011, but the same circumstances continued.

         For some eighteen months after June 2011, 1st Team received no financials, despite repeated requests. Personal training fees were received only intermittently.

         In November 2012, Illiano met with Don and Diane and advised that he was discussing selling the Gym to SNAP Fitness. The couple objected and asserted that they would exercise the right of first refusal that 1st Team had under the Operating Agreement. Illiano agreed that he would not sell and he broke off the negotiations.

         On Sunday, March 3, 2013, Illiano asked Don to meet in the former's office. Illiano told Don that he had sold the Gym to SNAP Fitness. The circuit court found as a fact that Illiano told Don that "it's nothing personal, I can't afford to lose my empire."

         The "Empire"

         English is not Illiano's first language. He testified with a "heavy accent."[2] Since coming to the Mt. Airy area, he has acquired numerous business interests. Interests held by Illiano as of January 1, 2010, were:

• BAIA, LLC, owning real estate assessed in excess of $13, 000, 000;
• Ridgewill, LLC, owning interests in two commercial properties that are leased;
• The Mt. Airy Inn, a restaurant;
• Napoli, Inc., a pizza restaurant;
• Lenanos, LLC, owning the Mt. Airy Green Turtle, a restaurant; and
• Germantown Green Turtle, a restaurant.

         Illiano has "silent partners" in BAIA, Lenanos, the Germantown Green Turtle and the Mt. Airy Inn, but he controls each of the companies.

         Illiano views each component of the "empire" as a company owned by him. Illiano testified that if there were bills to be paid by one company, but it did not have cash to pay the bill, he would take the money from another company and put it back later. From a bookkeeping standpoint, this was recorded through an account that was added to the QuickBooks computerized accounting system utilized by the companies. That account was labeled "Due to/from Frank." The bookkeeper employed by Illiano Properties, which was the management corporation for the "empire, " testified that there were twenty entities wholly or partially owned by Illiano. That witness also testified that she did not handle the intra-company transfers of funds and explained, "Frank would take care of those kinds of transactions himself." She would cut checks at his direction. The "Due to/from Frank" account had been used for at least ten years since the QuickBooks system was initiated.

         The Empire In Peril

         On direct examination, Illiano had testified that the reason for the sale of the Gym was its lack of profitability. On cross-examination, he was impeached by certified copies of court records of creditors' suits against businesses in the empire. Illiano's lender, on February 14, 2013, entered a confessed judgment against him, his wife and various of his companies for roughly three-quarters of a million dollars. Illiano acknowledged that immediately after those judgments were entered, he contacted SNAP Fitness to sell the Gym. He was also sued by at least one other bank. In addition, the federal and state governments imposed tax liens.[3]

         The Sale

         The sale of the Gym closed Friday, March 1, 2013, pursuant to documents executed that day. It was a sale of the assets of Pozzuoli. The purchase price was $410, 000. After deductions for the payoff of leases on equipment ($144, 211.55) and for a holdback, Pozzuoli netted a total of $260, 958.45 that was wired by SNAP Fitness to the Gym's account at Damascus Community Bank.

         At the meeting between Illiano and Don on Sunday, March 3, following the sale, the former told the latter that one-half of the net proceeds from the sale, after expenses and liabilities, was approximately $55, 000. Illiano requested that Don execute a release on behalf of 1st Team, before paying 1st Team's share of the net proceeds. Don refused, and the share was not paid.

         After this matter was in litigation, Illiano produced four statements that purported to account for the $410, 000 paid for the assets of Pozzuoli. In addition to the payoff of $144, 211.55 on the equipment lease and holdback offsets of $4, 830, the statements claimed expenses for legal fees, property taxes, a $63, 667 balance on "Loan to Frank, " reconciliations with the landlord (BAIA, LLC), a brokerage/consulting fee of 10% (to an Illiano company) and "unbilled" startup costs for the Gym claimed to have been paid by Illiano Properties. The 1st Team share of the net, after expenses, per these statements, ranged from $61, 352.76 to a loss of $21, 407.16.

         The damages theory adopted by the court did not require addressing the legal enforceability of these offsets, claimed by Illiano, against the amounts wired to Pozzuoli by SNAP Fitness, as we explain below.

         The Damages Calculation

         The Caparottis engaged a forensic accountant, Andrew Runge, to analyze the accounting for the sale proceeds. This ultimately led him to the "Due to/from Frank" bookkeeping account and to the Pozzuoli checking account at Damascus Community Bank. The buyer had wired $255, 788.45 on March 1, 2013, to the Pozzuoli checking account. That same day, Pozzuoli purchased, for eight dollars, a Treasurer's check for $200, 000 payable to BAIA, LLC. The net of $5, 170 from the asset purchase holdback was wired to Pozzuoli's bank account no later than May 13, 2013. On May 30, 2013, a Treasurer's check was purchased from that account for $5, 000, payable to "Illiano Property, Inc."

         Mr. Runge analyzed the Pozzuoli checking account for the period beginning with 1st Team's acquisition of a 50% interest in the Gym, i.e., from January 1, 2009. In the three years between March 2010 and March 2013, there were sixteen checks drawn, totaling $422, 612, for which a Pozzuoli business purpose was not noted in the records. Of these, fifteen were payable to Damascus Community Bank, almost all of which were to purchase Treasurer's checks. The Treasurer's checks, in turn, were payable to entities in the "empire." Mr. Runge was "unclear as to why [Treasurer's checks] would be employed other than to potentially obviscate [obfuscate] the source of these funds."

         Runge's analysis of the "Due to/from Frank" account on the books of Pozzuoli, for a comparable period, lists, in small, single-spaced print, over three 8½" pages, transactions that are classified as "Withdrawals" or "Infusions." There was a total of $567, 949.97 in withdrawals. "[B]ased on what [he] was able to verify or look at, " Runge opined that "that $567, 949.97 went out of the account and there was not documentation provided to demonstrate that that was in fact a valid expense of Pozzuoli." Runge's analysis totaled the infusions at $282, 702.04. These had been deposited to the Pozzuoli account "and looked like [they were] not revenue attributable to Pozzuoli." Runge also opined that additional credits against the excess of withdrawals over infusions should be given for one-half of Pozzuoli's net income shown on its tax returns for 2010-2012 and for the $140, 000 agreed upon in the operating agreement statement as Illiano's startup loans. Thus, the net claim against Illiano on the transactions processed through the "Due to/from Frank" account on the books of Pozzuoli was $105, 219.

         Thus, the judgment awarded to 1st Team was $422, 612 $105, 219 x l/2 = $263, 915.

         The Fact Findings

         The circuit court decided this case in a fifty-two page opinion. It found that Illiano's "breaches and misrepresentations" included the ...

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