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IN THE CIRCUIT COURT FOR MONTGOMERY COUNTY, MARYLAND
STEPHEN B. BENNETT Plaintiff, v. DAMASCUS COMMUNITY BANK, et al. Defendant. : : : : : : : : :

Case No.: 267722-V

MEMORANDUM AND ORDER I. Procedural Overview On December 29, 2005, plaintiff Stephen B. Bennett filed a three count Complaint. Named as defendants were his former employer, Damascus Community Bank ("the Bank") and five members of the Board of Directors (J. Daniel Rawlings, Bernard L. Moxley, Douglas D. Browning, George C. Cramer and Stephen J. Deadrick, collectively the "individual defendants") who allegedly caused his wrongful dismissal as president of the Bank in November 2004. In Counts I and III, Bennett sued in his individual capacity for a declaration that his termination as president was wrongful and for damages arising from the alleged wrongful termination. In Count II, Bennett purported to sue derivatively, on behalf of the Bank, alleging, apparently, that the Bank wrongfully terminated his employment and hired another individual as its president. Notwithstanding his removal as an officer, Plaintiff remains a director and shareholder of the Bank. Bennett did not sue Cynthia B. Cervenka, who replaced him as president, and who was not a member of the Board at the time of his removal but is now a member of the Board. On February 13, 2006, the individual defendants moved to dismiss the original Complaint or, in the alternative, for summary judgment. On February 14, 2006, the Bank moved to dismiss Count II. On March 2, 2006, before a ruling on any of the pending motions, Bennett filed an

Amended Complaint under Maryland Rule 2-341(a). The Amended Complaint does not refer to the original Complaint and, therefore, it is the operative pleading before the court. P. NIEMEYER & L. SCHUETT, MARYLAND RULES COMMENTARY 251 (3d ed. 2003). On March 8, 2006, the Bank again moved to dismiss Count II of the Amended Complaint, the derivative count. As well, the individual defendants on March 9, 2006, moved to dismiss the Amended Complaint or, in the alternative, for summary judgment. The court held a hearing on all pending motions on April 6, 2006. II. Legal Standards Applicable to the Pending Motions With respect to Counts I and III, the individual defendants have filed a "speaking demurrer" under Maryland Rule 2-322(b). Hrehorovich v. Harbor Hosp. Ctr., Inc., 93 Md. App. 772, 782-83 (1992). Because the court has referred to and will in fact consider matters outside of the pleadings (e.g., Bennett's affidavit, the defendant directors' affidavits, the Bank's Bylaws, minutes of Board meetings, various letters), pursuant to Maryland Rule 2-322(c), the individual defendants' motion will be considered as a motion for summary judgment under Maryland Rule 2-501. Bleich v. Florence Crittenton Services, 98 Md. App. 123, 132-33 (1993); P. NIEMEYER at 206-07. In considering these counts, therefore, the court will apply the customary summary judgment standards. Okwa v. Harper, 360 Md. 161, 177-78 (2000); Green v. H & R Block, 355 Md. 488, 502 (1999); Warner v. German, 100 Md. App. 512, 516-17 (1994). In seeking the dismissal of Count II, the derivative claim, the parties again have referred to matters outside of the Amended Complaint. Consequently, for reasons that will become apparent, the court will consider the motion to dismiss Count II under Maryland Rule 2-502. See Werbowsky v. Collomb, 362 Md. 581, 621 & n.13 (2001).

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III. The Parties' Principal Contentions Plaintiff Bennett is a stockholder and director of the Bank. Until November 2004, he also served as the Bank's president. Bennett became president of the Bank in 1998 under an "at will" employment agreement. On November 17, 2004, the directors of the Bank notified Bennett that his employment as president had been terminated. Bennett remains a major stockholder of the Bank, as well as a member of its Board of Directors. In Counts I and III of the Amended Complaint, Bennett sued in his individual capacity and seeks money damages. Specifically, in Count I, Bennett seeks a declaration that the Board's decision to terminate him was wrongful, that he should be reinstated as president, and receive all back wages and other employee benefits. In Count III, Bennett alleges that the defendants breached his "at will" contract because, he contends, the Bank did not follow the proper procedures in terminating him. Count II is a purported derivative claim brought on behalf of the Bank, seeking damages payable to the Bank. The conduct at issue in Count II mirrors that at issue in Counts I and III, and all operative facts arise out of Bennett's alleged wrongful termination and the Bank's decision to hire a new president. IV. The Derivative Claim - Count II The legal differences between derivative claims and direct claims recently were summarized by the Court of Special Appeals, as follows: A derivative claim is a claim asserted by a shareholder plaintiff on behalf of the corporation to redress a wrong against the corporation. The defendant in a derivative action may be a corporate fiduciary, such as a director, who committed a wrong against the corporation. The action is "derivative" because it is brought for the benefit of the corporation, not for the shareholder plaintiff. Kramer v. Western Pacific Indus., Inc., 546 A.2d 348, 351 (Del. 1988). For that reason, ordinarily, damages recovered in a derivative suit are paid

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to the corporation. Id. By contrast, a "direct" action is a claim asserted by a shareholder, individually, against a corporate fiduciary, such as a director, to redress an injury personal to the shareholder. Kramer, 546 A.2d at 351 (quoting R. Clark, Corporate Law 639-40 (1986)). Because damages recovered in a direct action are to remedy the shareholder plaintiff individually, they are payable to him, not to the corporation. Paskowitz v. Wohlstadter, 151 Md. App. 1, 9 (2003). Count II of the Amended Complaint manifestly seeks relief on behalf of the Bank, and not relief to Bennett personally. Paragraph 22 plainly states: " The Bank has been damaged by the payment of a replacement President's wages and benefits, while, at the same time incurring liability for wages and benefits owed to Mr. Bennett and losing the valuable services of Mr. Bennett as its President." (emphasis added). In a shareholder derivative suit, the making of a pre-suit demand, or pleading facts sufficient to show that one would be futile, is both a procedural requirement and a matter of Maryland substantive corporate law; the demand requirement is not simply a procedural nicety. Werboswky, 362 Md. at 601; Danielewicz v. Arnold, 137 Md. App. 601, 627-29 (2001). The same holds true in Delaware, where it is considered both a procedural and substantive requirement. See, e.g., Levine v. Smith, 591 A.2d 194, 201 (Del. 1991); Aronson v. Lewis, 473 A.2d 805, 811-12 (Del. 1984). In both the original Complaint (

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