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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND * * * Plaintiffs, * * v. * Civil No. JFM 99-1778 * IMC MORTGAGE COMPANY, et al., * * Defendants. * * * ***** MEMORANDUM BRIAN HOLMAN, et al., On June 30, 1997 Brian Holman ("Holman") and Richard Toomey ("Toomey") entered into an agreement with IMC Mortgage Co. ("IMC") to sell the assets of their company, Central Money Mortage Co., Inc. ("CMM"). The Asset Purchase Agreement ("APA") resulted from lengthy negotiations between Holman and Toomey and IMC representatives, in particular Mitchell Legler ("Legler"), who was IMC general counsel and one of its directors. Under the terms of the APA, IMC would pay Holman and Toomey a base payment equal to $11 million and a contingent payment calculated according to CMM's financial condition and future earnings. IMC would pay the base payment by issuing $11 million worth of stock to Holman and Toomey. The APA determined the number of shares by dividing $11 million by the stock's average closing price during the last 10 days of June 1997 ("Average Quoted Price" or "AQP"), which equaled 640,933 shares. To enable Holman and Toomey to convert some of these securities into cash, IMC and the plaintiffs entered into another agreement, the Registration Rights Agreement ("RRA"), which required IMC to register a number of shares with the Securities and Exchange 1

Commission ("SEC"). The RRA calculated this subset of shares by dividing $5.4 million (roughly half the total base payment) by the AQP. Under this formula, IMC agreed to register 314,640 of the 640,933 base payment shares within 20 days of the closing. The remaining shares could not be sold without meeting an exemption to the SEC rules governing restricted securities. IMC also entered into employment agreements with Holman and Toomey. Under the terms of the identical agreements, Holman became the President of CMM (now an IMC affiliate) and Toomey served as Vice-President. The agreement provided five-year terms and base salaries for Holman and Toomey of $300,000 per year with annual cost of living adjustments. Although either party could terminate the agreement, if IMC did not terminate Holman or Toomey for cause, it was obligated to pay the respective employee the remaining salary through the term. The parties closed the transaction on August 19, 1997 but IMC failed to register the shares within 20 days of closing. Accordingly to IMC, its securities counsel advised it that registering the shares would undermine a potential IMC debt offering; the debt offering subsequently feel through. In January and February of 1998 the parties discussed alternative ways to give Holman and Toomey the benefit of their bargain. Under SEC rules, as of August 19, 1998, all the shares transferred to Holman and Toomey would be alienable. IMC proposed that on August 19, 1998, if the value of the nonregistered 314,640 shares did not equal $5.4 million, they would "top off" the plaintiffs with sufficient "saleable" shares so that their shares would equal $5.4 million. On August 19th and 20th, 1998, Legler and Stuart Marvin ("Marvin"), IMC's Chief Financial Officer, drafted documents affecting this proposal. Because the August 19, 1998 share price was less than the AQP, Legler prepared documents transferring to the plaintiffs an additional 2

96,790 shares in order to give the plaintiffs value of $5.4 million. The necessary documents did not reach the plaintiffs until August 24, 1998. Between August 19th and 24th, the share price dropped from $12.56 to $10.50. The plaintiffs did not sell their shares; they claim that Legler failed to issue a required opinion letter. They claim Legler's inaction also prevented them from selling the 326,293 shares constituting the remainder of the base payment. By October 1998, the shares were selling for less than $2. The plaintiffs filed suit against IMC and Legler on June 17, 1999. They claimed that Legler and IMC fraudulently induced them into entering the APA by promising to register the 314,640 shares. On August 13, 1999 IMC terminated their employment. The plaintiffs subsequently amended their complaint to include claims for breach of the APA and RRA, negligence and breach of the employment contracts. The plaintiffs move for summary judgment on counts IV and V for breach of the APA (and RRA), and counts VII and VIII for breach of the employment contracts. IMC and Legler move for summary judgment on counts I, II and III for fraud; IMC also moves for summary judgment on counts VII and VIII for breach of the employment contract.1 The plaintiffs have filed a Motion to Amend the Amended Complaint to include a claim for fraud based on Legler's representations after September 9, 1997. I will address the counts in order. I. In counts I-III, the plaintiffs assert claims against Legler and IMC for fraud under Maryland common law, 15 U.S.C.

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Maryland Law