Md. appeals court revives shareholder suit alleging ‘de facto dividend’

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Maryland’s second-highest court has revived the shareholder lawsuit of a man who claims his mother and brother illicitly enriched themselves while not paying him a “de facto dividend” for his 28% share of the family business from which he was fired.

In a reported Dec. 22 decision, the Maryland Appellate Court said a trial judge wrongly dismissed Edward Mekhaya’s claim that Vipa and Oscar Mekhaya violated their duty as company directors to acknowledge his 28% share in Eastland Food Corp. — stock he claims to still hold despite his firing.

Vipa and Oscar, in their successful motion to dismiss, said Edward had not presented any evidence that he had a right to a dividend from the Jessup-based food importer and distribution company, which is also a defendant.

But the Appellate Court ruled Edward has sufficiently alleged that Vipa and Oscar breached their fiduciary duty to him as a shareholder, unjustly enriched themselves at his expense and took actions to “oppress” him as a minority stockholder.

Edward still has the burden of proving his allegations at trial, the court added.

According to court papers, Vipa holds a 35% interest in Eastland, while Oscar – like Edward – holds a 28% interest. Oscar’s children hold the other 9%.

Edward, whose salary was $400,000, was fired from the company in the spring of 2018 and filed suit in 2021 in Howard County Circuit Court.

He alleges Vipa and Oscar received such “excessively high” salaries from the company that the money paid to them amounted to a “de facto dividend” which must be distributed to all shareholders.

Edward claims their failure to pay him the dividend breached their fiduciary duty as directors of Eastland. In addition, their retention of money owed to Edward resulted in their unjust enrichment, and their thwarting of his “reasonable expectation” of payment amounted to oppressive behavior toward a shareholder, Edward alleges.

Vipa, Oscar and Eastland deny the allegations of wrongdoing and have noted that a dividend was never declared.

In reviving Edward’s lawsuit, the Appellate Court said an excessive salary paid to employed shareholders could qualify as a de facto dividend.

“(Edward) Mekhaya’s flagship allegation was that, as a shareholder, he expected to share in company profits by receiving a de facto dividend as part of his salary,” Judge Glenn T. Harrell Jr. wrote for the Appellate Court.

“That expectation was reasonable, despite the fact that Eastland never declared officially a dividend,” added Harrell, a retired judge sitting by special assignment. “Thus when (the defendants) terminated Mekhaya’s employment and stopped paying his salary, thereby depriving him of the de facto dividend portion, arguably (they) defeated substantially Mekhaya’s reasonable expectation as a shareholder.”

Edward’s attorney hailed the court’s decision, which he said “clarified if not expanded Maryland law” with its recognition of de facto dividends.

“It doesn’t have to be called a dividend if it walks and talks like a dividend,” added Paul N. Farquharson, of Semmes, Bowen & Semmes in Baltimore.

Vipa’s attorney, Jeffrey M. Orenstein, declined to comment on the court’s decision. Orenstein is with Wolff & Orenstein LLC in Rockville.

Neither Oscar’s attorney, James M. Hoffman, nor Stuart A. Berman, counsel for Eastland, immediately responded to a request for comment Thursday.

Hoffman is with Offit Kurman P.A. in Bethesda; Berman is with Lerch, Early & Brewer Chtd., also in Bethesda.

Harrell was joined in the opinion by Judges Stuart R. Berger and Anne K. Albright.

The Appellate Court rendered its decision in Edward Mekhaya v. Eastland Food Corp. et al, No. 266 September Term 2022.