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Breach of fiduciary duty exists, Md. high court says

Brynja McDivitt Booth, the newest jurist on the Maryland Court of Appeals. (The Daily Record / Bryan P. Sears)

Judge Brynja M. Booth, shown during a 2019 appearance before the General Assembly, wrote the opinion for the unanimous Court of Appeals. (The Daily Record/File Photo)

Company investors harmed by the business decisions made by the corporation and its majority owner may pursue litigation against them, Maryland’s top court unanimously ruled Tuesday in stating clearly that Maryland recognizes breach of fiduciary duty as an independent cause of civil legal action.

The investors’ claim can be made upon a showing that the corporate leadership breached its duty to act in their best financial interest, causing them harm, the Court of Appeals held.

The high court rendered its decision in holding that Glen Burnie-based Trusox LLC and its majority owner, James P. Cherneski, owed but did not violate their fiduciary duty to the sports apparel company’s minority investors.

In its 7-0 decision, the Court of Appeals acknowledged its nearly quarter century of fomenting confusion among lawyers and judges regarding whether harmed investors could sue for breach of fiduciary duty. A lack of consistency in Court of Appeals’ decisions since 1997 had led to conflicting lower court rulings and has spurred criticism among legal commentators, the high court said.

In fact, the Court of Appeals’ clear statement on Tuesday came after the intermediate Court of Special Appeals took the rare step of asking the high court whether the cause of action exists rather than answering the question itself in the first instance and enabling the losing party — Trusox and Cherneski or the minority investors — to seek review by the top court.

“When attempting to answer the question, Maryland appellate courts have not spoken uniformly on this issue,” Judge Brynja M. Booth wrote for the Court of Appeals.

“Indeed, this court has made seemingly inconsistent pronouncements, at times calling for a case-by-case analysis, and at other times, making a blanket assertion that ‘Maryland does not recognize a separate tort action for breach of fiduciary duty,’” Booth added. “Litigants pick and choose which statement they believe to be controlling. Understandably the muddled state of our jurisprudence has created inconsistent and irreconcilable conclusions by the Court of Special Appeals, federal courts, and state circuit courts.”

Attorney Paul Mark Sandler, whose critique of the judiciary’s confusion on breach of fiduciary duty Booth cited, said Wednesday that he welcomed the high court’s clarification.

“I read the opinion with great interest,” said Sandler, who noted the court’s absence of clarity in the 2018 edition of Pleading Causes of Action in Maryland, which he wrote with James K. Archibald. “I am pleased that the Court of Appeals has resolved the issue once and for all that there is an independent cause of action for breach of fiduciary duty in Maryland.”

The Court of Appeals, though recognizing the cause of action, ruled that the Anne Arundel County Circuit Court correctly held that Trusox’s minority investors had not proven their allegation that the company and Cherneski had breached their fiduciary duty.

Cherneski, a former minor league soccer player and coach for Crystal Palace Baltimore, developed and patented a sock that eliminates the sliding of an athlete’s foot during activity.

With Sanford Fisher and Jeff Ring as minority investors, Cherneski formed Trusox in 2011 to produce and sell the footwear. When William H. Plank II joined as an investor in 2013, the company was divided four ways, with Cherneski – the president and chief executive officer — owning 65%, Plank 20% and Fisher and Ring 7.5% each.

In 2015, Plank and Fisher sued, alleging Trusox and Cherneski had breached their fiduciary duty by putting the investors’ stake at risk and the company in legal jeopardy.

Plank and Fisher, in the lawsuit Ring did not join, claimed the company and its owner had violated Maryland’s wage and hour laws by shortchanging employees; sold  unregistered securities; misled potential investors regarding the litigation and  revenue projections; misrepresented the company by saying it had rejected a $40 million offer from Nike; and infringed on trademarks and promotional rights of professional athletes through the unauthorized use of their photographs.

But the circuit court found that Trusox employees were properly paid; that the company fell under an exemption to the registration requirement; that Trusox appropriately told would-be investors of the litigation, revenue projections and Nike’s confirmed, verbal offer; that the infringement allegations were merely speculative; and that the company had purchased rights to use the photographs.

Plank and Fisher sought review by the Court of Special Appeals, which essentially referred the case to the high court by seeking clarification on whether Maryland recognizes a cause of action for breach of fiduciary duty.

Plank is an older brother of Kevin Plank, founder of the Baltimore-based sports apparel company Under Armour Inc.

The Court of Appeals issued its decision in William H. Plank II et al. v. James P. Cherneski et al., Misc. No. 3, September Term 2019.

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