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REPORTED IN THE COURT OF SPECIAL APPEALS OF MARYLAND No. 505 September Term, 2006

SCOTT BENDER

v.

STEVEN SCHWARTZ

Murphy, C.J., Eyler, James R., Adkins, JJ. Opinion by Eyler, James R., J. Filed: March 1, 2007

REPORTED IN THE COURT OF SPECIAL APPEALS OF MARYLAND No. 505 September Term, 2006

SCOTT BENDER

v.

STEVEN SCHWARTZ

Murphy, C.J., Eyler, James R., Adkins, JJ. Opinion by Eyler, James R., J. Filed:

This appeal stems from a dispute between members of the Bender family, shareholders in two corporations, Blake Construction Co., Inc., a Delaware Corporation ("Blake"), and Glade Valley Farms, Inc., a Maryland corporation ("Glade Valley"), and partners in various related partnerships. Scott

Bender, et al., appellants, appeal from an order of the Circuit Court for Montgomery County dismissing their shareholder derivative action filed against Steven Schwartz, et al., appellees. Procedural and Factual Background Appellants are Morton Bender, four of his children (Scott, Jay, Kenneth, and Lisa Bender Feldman) and the eight Alpha Trusts controlled by Jeffrey, the fifth child, minority shareholders in Blake and Glade Valley. Blake is engaged in real estate and

construction activities, and Glade Valley owns a large horse farm in Frederick County and boards, breeds, trains, and sells race horses. Both corporations are nominal appellants.

Appellees are the directors, officers, and controlling shareholders of Blake and Glade Valley: Stanley Bender, Howard Bender, Sondra Bender, David Bender, SSB, LLC (formerly Stanley S. Bender, a Blake shareholder), Stanley Prill, and Steven Schwartz. Appellees Howard Bender, Stanley Bender, David Bender,

and Steven Schwartz are officers of Blake, and Stanley Prill was an officer of Blake until 2001. Howard Bender and Stanley Bender

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are directors of Blake.

Stanley Prill was a director of Blake David Bender was elected

until his resignation on June 1, 1998.

a director of Blake in 2003, after the filing of this action. Glade Valley's current directors are Howard Bender, Sondra Bender, and Dr. Robert Leonard. Stanley Prill has had no

interest, position, or involvement with Glade Valley. Appellants filed their original complaint on October 2, 2002, alleging waste of corporate assets and breach of fiduciary duty. Appellants asserted that the case should be allowed to

proceed as a shareholder derivative action without demand upon the boards of directors of Blake and Glade Valley because demand would be futile. Appellees moved to dismiss the complaint,

arguing that the facts alleged were insufficient to excuse a demand on the boards of directors. After a hearing on March 11,

2003, the circuit court granted appellees' motion to dismiss, with leave to amend. Appellants did not amend in an attempt to

state additional facts to show that demand should be excused. On March 17, 2003, appellants sent a demand letter to the boards of Blake and Glade Valley, demanding that the directors investigate the allegations in the First Amended Complaint ("FAC"), attached thereto, which had not yet been filed, and bring an action against the appellees for various breaches of fiduciary duty. The demand letter and FAC alleged that appellees had

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committed specific acts of corporate waste and diversions of corporate opportunities. claims included: - Excessive salaries, benefits and fees to the [appellees]. - Causing Blake, the Partnerships and Glade Valley to enter into transactions in which [appellees] (or members of their family) were personally interested. - Failing to adhere to Delaware and Maryland codes. - Failing to properly respond to Scott Bender's Section 220 Action [a request for documents under the Delaware Code]. - Loaning from Blake to Glade Valley, detrimentally to Blake. - Theft of corporate opportunities by CCSI [Contract Cleaning Services, Inc.], JIB Monitoring, and SB Construction Company. - Theft of corporate opportunities by development projects owned by only some of Blake's shareholders. - Using Blake employees and equipment to provide personal services to the Defendants. - Concealing transactions. - Use of Glade Valley by Howard and Sondra without fair compensation. . . . . - Placing Glade Valley in a Joint Venture with Blake. (citations to demand letter and FAC omitted). On April 10, 2003, appellants filed the FAC. -3As stated in appellants' brief, these

In May 2003, the directors of Blake and Glade Valley appointed special committees (hereinafter "Demand Committee(s)" or "Committee(s)") to investigate the allegations in the demand letter and FAC. Specifically, on May 13, 2003, Glade Valley

appointed director Dr. Robert A. Leonard (one of the original shareholders of Glade Valley who retired in 2000, but who is accused of no wrongdoing), as its "disinterested" Demand Committee. On May 20, 2003, Blake elected three new directors,

two of whom, Melvin J. Estrin and Richard S. Cohen, were appointed as the "disinterested" Demand Committee. Each Demand

Committee was given full authority to investigate and act authoritatively on behalf of their respective corporations as to appellants' demand. Each retained independent legal counsel to

assist in its investigation and report. On May 23, 2003, appellees moved to dismiss the FAC. The

circuit court held hearings on November 25, 2003 and February 19, 2004. The court determined that a further hearing would be held

on the partnership claims1 and stayed the derivative claims pending the reports of the Demand Committees. The Glade Valley Demand Committee issued its report in April 2004 and submitted it to the court on August 17, 2004. The

No hearing was ever held on the partnership claims because appellants abandoned their partnership claims when they filed their second amended complaint, discussed below. -4-

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report was sixteen pages long with sixteen exhibits.

The Blake

Demand Committee issued its report in June 2004 and submitted it to the court on August 16, 2004. The report was sixty-one pages Both reports

long with one hundred and eighty-four exhibits.

concluded that there was no basis for the allegations in the FAC and that litigation should not be pursued. On September 24, 2004, the circuit court entered an order that allowed appellants limited discovery into the reasonableness of the Demand Committees' investigations. On June 25, 2005,

appellants filed a Second Amended Complaint ("SAC"), alleging wrongful refusal of demand. The SAC, at issue in this appeal, contained two counts, in which appellants alleged that the Demand Committees failed to adequately investigate the allegations in the demand letter, and wrongfully refused the demand to authorize the derivative suit against appellees. Appellants also alleged that the

investigations by the Demand Committees revealed other additional areas of breach of duty including excessive bond fees, the excessive payment of fifteen million dollars in life insurance premiums, and breach of duty in connection with a racing stable run by Howard and Sondra on the grounds of Glade Valley. Appellees moved to dismiss on the grounds that (1) appellants alleged no facts showing that the Demand Committees were not independent and that the investigations were not

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reasonable, (2) many of the claims in the SAC were not raised in the demand letter, and (3) many of the claims alleged harm to appellants individually and were not derivative claims. After a hearing on March 2, 2006, the circuit court, by Memorandum Opinion and Order ("Mem. Op.")dated March 28, 2006, dismissed the SAC with prejudice. Standard of Review The circuit court, by agreement of the parties, decided the issues before us, not on a motion to dismiss, but under Maryland Rule 2-502, whereby: [i]f at any stage of an action a question arises that is within the sole province of the court to decide, . . . and if it would be convenient to have the question decided before proceeding further, the court, on motion or on its own initiative, may order that the question be presented for decision in the manner the court deems expedient. In resolving the question, the court may accept facts stipulated by the parties, may find facts after receiving evidence, and may draw inferences from these facts. The proceedings and decisions of the court shall be on the record, and the decisions shall be reviewable upon appeal after entry of an appealable order or judgment. A decision under Rule 2-502 is a trial on the merits, with respect to the issues decided. Thus, as in all actions tried

without a jury, we shall review questions of law de novo and shall not set aside the circuit court's findings of fact unless they are "clearly erroneous." See Md. Rule 8-131(c). The

The issues were tried on a documentary record. -6-

underlying facts were not in dispute, but inferences to be drawn and the conclusion to be reached were in dispute. The circuit

court reviewed the record and determined that: (1) the investigations by the Demand Committees were reasonable; (2) some of appellants' claims had not been presented to the Committees; and (3) some of appellants' claims were personal, not derivative, in nature. With respect to the determination of reasonableness,

the circuit court applied the business judgment rule to all except three of the challenged transactions, to which it applied an entire fairness standard. To the extent that the circuit court resolved conflicting inferences of fact, we shall defer to those factual determinations. It appears that the circuit court's ultimate Thus, we shall

conclusions were conclusions of law, however.

perform essentially the same function as the circuit court. Contentions Appellants present the following questions for our review on appeal, as rephrased by us: 1. Did the circuit court err in concluding that (a) the

Demand Committees properly utilized the business judgment test in reviewing the challenged transactions, as opposed to an entire fairness test, and (b) in applying the business judgment rule itself, rather than the entire fairness test, to all but three of appellant's claims?

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2.

Did the circuit court err in finding that certain claims

were not raised in the Demand Letter or the attached FAC and, therefore, did not need to be investigated by the Demand Committees? 3. Did the circuit court err in finding that the Demand

Committees' investigations were reasonable? 4. Did the circuit court err in dismissing the individual

claims with prejudice? Finding no reversible error, we will affirm the judgment of the circuit court. Discussion Substantively, a shareholder derivative suit is governed by the law of the state of incorporation. Serv., Inc., 500 U.S. 90, 108-09 (1991). Kamen v. Kemper Financial Because Blake is a Because

Delaware corporation, Delaware law controls its actions.

Glade Valley is a Maryland corporation, Maryland law controls its actions. I. Standard for Wrongful Refusal of a Demand

Generally, the business and affairs of a corporation, including the decision to institute litigation, are managed under the direction of its board of directors. Aronson v. Lewis, 473

A.2d 805, 811 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000); Werbowsky v. Collomb, 362 Md. 581, 598-99 (2001). Developed as a check on that power, the

derivative form of action permits an individual shareholder or a -8-

group of shareholders to bring "suit to enforce a corporate cause of action against officers, directors, and third parties" where those in control of the company refuse to assert a claim belonging to it. Kamen, 500 U.S. at 95 (quoting Ross v.

Bernhard, 396 U.S. 531, 534 (1970)); see also Werbowsky, 362 Md. at 599. "If the wrong alleged was committed against the

stockholder rather than the corporation, then the stockholder must bring the action as a direct action

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