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Judge rules Rockville executive paid reasonably, no dividends due

After prevailing in a lawsuit brought by the bankruptcy trustee of a former co-owner, a Rockville business and its majority shareholder will be back in court next week to argue a computational error does not affect the judge’s verdict.

Rehab at Work Corp. was accused in 2014 of improperly loaning money and paying an inflated salary to its director and majority shareholder, Julie Hower, according to the complaint. The bankruptcy trustee argued these were disguised dividends, meaning the estate was entitled to them as well.

“It was an attempt, basically, on their part to claw back what they believed to be excessive compensation and other expenses that they believed to be inappropriate,” said Christopher C. Fogelman, who represented Rehab at Work and Hower.

Fogelman said his client owned 55 percent of Rehab at Work and, prior to his declaring bankruptcy, her ex-husband, Ray Hower, owned the remaining 45 percent. The trustee took over as the minority shareholder.

The trustee sought $1.5 million in damages, Fogleman said, but Montgomery County Circuit Judge Michael D. Mason ruled in favor of Rehab at Work, finding the expenditures should be classified as compensation and were reasonable.

“He relied heavily on the testimony of our expert who said this was all within the range of reasonable compensation for an executive who was performing the duties that Ms. Hower was,” said Fogleman, of Gleason, Flynn, Emig & Fogleman, Chtd. in Rockville.

The plaintiff’s expert testified that Hower was overpaid based on her performance compared to other executives, according to Peter R. Kolker, of Zuckerman Spaeder LLP in Washington D.C.

“I understand the judge has to select some expert and he didn’t like mine as much as he liked theirs,” Kolker said.

Miscalculation in ruling

The defense expert presented a reasonable range for compensation to Hower, and Mason used the low-end of the range in announcing his opinion, according to Fogleman. But Mason’s calculation led to an incorrect amount for Julie Hower’s compensation in 2015 – a partial year’s worth rather than 12 months –, leading Kolker to file a motion to alter or amend the judgment.

The change in calculation would alter Mason’s finding that Hower was underpaid to show that she was overpaid by approximately $135,000 over the course of four years, Kolker said.

The purpose of the motion is not to relitigate the issue of which expert was correct, according to Kolker, but merely to explain to the judge that the calculations must be done correctly to accurately make an assessment.

The hearing on the motion is scheduled for Thursday.

Fogleman said he does not believe changing the calculation changes the outcome.

“We certainly provided some reasons why we think what he had done was still, even with the little math error, perfectly fine,” Fogleman said.

Small-company complications

Fogleman said the case was unusual in some of its details, but it is not uncommon for small companies to end up in court when family members – or former spouses – have a falling out.

It was common practice when the Howers were married and working for Rehab at Work to pay for personal expenses with company funds, according to Fogleman, and there were no problems because the two were the sole shareholders.

“Things that were OK when everyone was getting along suddenly become not OK,” Fogleman said. “It was all fine when you were in the business. Why is it wrong now?”

What made the case unique, according to Fogleman, was the fact that the bankruptcy trustee was “standing in the shoes” of Ray Hower. Julie Hower was a creditor in the bankruptcy action, he said, and would be entitled to part of any money obtained by the trustee.

Ray Hower was not present at the trial and did not testify, according to Fogleman.

Merrill Cohen, Chapter 7 Trustee v. Rehab at Work, Corp., et al.

Court: Montgomery County Circuit Court

Case No.:378975-V

Judge: Michael D. Mason

Outcome: Verdict for the defendant following a bench trial. A motion to alter or amend the judgment was filed by the plaintiff and scheduled for a hearing Feb. 4.

Dates:

Incident: March 2011 to August 2015

Suit filed: March 25, 2014

Verdict: Nov. 24, 2015

Plaintiffs’ Attorneys: Peter R. Kolker of Zuckerman Spaeder LLP in Washington D.C.

Defendants’ Attorneys: Christopher C. Fogleman of Gleason, Flynn, Emig & Fogleman Chtd. in Rockville

Counts: Recovery of debt for distributions wrongfully made by law and three derivative counts, constructive fraud