1st TEAM FITNESS, LLC, et al.
Berger, Reed, Rodowsky, Lawrence F. (Retired, Specially
1st Team Fitness, LLC (1st Team) brought this action,
directly and derivatively, on behalf of Pozzuoli, LLC
(Pozzuoli), against the appellee, Francesco Illiano
(Illiano). 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.
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
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.
reasons hereinafter set forth, we shall affirm.
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.
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
• 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
• Illiano would be the managing member. In his sole
discretion, he would determine the amount of cash available
• 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.
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.
some eighteen months after June 2011, 1st Team received no
financials, despite repeated requests. Personal training fees
were received only intermittently.
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.
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."
is not Illiano's first language. He testified with a
"heavy accent." 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
• Germantown Green Turtle, a restaurant.
has "silent partners" in BAIA, Lenanos, the
Germantown Green Turtle and the Mt. Airy Inn, but he controls
each of the companies.
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.
Empire In Peril
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
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
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
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.
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.
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."
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
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
the judgment awarded to 1st Team was $422, 612 $105, 219 x
l/2 = $263, 915.
circuit court decided this case in a fifty-two page opinion.
It found that Illiano's "breaches and
misrepresentations" included the ...