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MAS Associates, LLC v. Korotki

Court of Appeals of Maryland

August 8, 2019

MAS ASSOCIATES, LLC, et al.
v.
HARRY S. KOROTKI

          Argued: March 1, 2019

          Circuit Court for Baltimore County Case No.: 03-C-11-010759

          Barbera, C.J. [*] Greene McDonald Watts Hotten Getty, Adkins, Sally D., (Senior Judge, Specially Assigned) JJ.

          OPINION

          ADKINS, J.

         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.

          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 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 & 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 line[3]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.

         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 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 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 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 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 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.

         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- 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 ...


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