Mekhaya v. Eastland Food Corp.

The circuit court erred in dismissing the claims of the appellant (Mekhaya) for shareholder  oppression, breach of fiduciary duty, and unjust enrichment against his former employer, Eastland Food Corp., and its board of directors. “Appellant alleged that, as a minority  shareholder in Eastland, he received, before his firing as an employee and removal from the board, and expected to continue to share (as a shareholder) in Eastland’s profits by receiving a ‘de facto’ dividend, which Eastland had been paying as part of the appellant’s salary prior to terminating his employment.” 

Those allegations were sufficient to state a claim for oppression, and the circuit court erred  in dismissing the claim. This could also result in a breach of fiduciary duty owed to the  appellant separate from any harm Eastland suffered. Claims of breach of fiduciary duty and  unjust enrichment are direct and not derivative. 

Opinion.

The appellant posed six questions that the Court of Appeals consolidated into two questions: 

1. Did the circuit court err in dismissing his complaint with prejudice and without leave  to amend?  
2. Did the circuit court err in denying his motion to alter or amend the court’s judgment? 

The circuit court erred in dismissing the appellant’s complaint and was reversed and  remanded for proceedings consistent with this opinion. Thus, the second opinion didn’t need to be addressed. 

Background.

“Eastland is a Maryland corporation that imports and distributes food and  other products from international and domestic suppliers.” Mekhaya rose to vice president of operations for Eastland. He received a 28% ownership interest in Eastland in 2008.  Mekhaya’s brother, Oscar, his children, and Mekhaya’s mother owned the remaining stock.  Until October 2018, Mekhaya was one of four members of the board of directors. Eastland  was formerly run by Mekhaya’s father, Pricha, president and director, who was removed in  2019 and replaced by Oscar, over Mekhaya’s objection. Mekhaya was fired in October 2018.  His compensation at the time was $400,000 per year. 

The complaint.

Mekhaya filed his complaint in 2021. Mekhaya claimed the appellees  engaged in a scheme to “take control” of Eastland and “oust” Mekhaya. Eastland held a  stockholder meeting in October 2018, in part to discuss “a proposed ‘dividend study’ to  consider ‘advantages of moving to shareholders getting dividends with respect to ownership  in lieu of their salaries being paid as if they were dividends.’” The study was dropped after  Mekhaya was removed from the board. Mekhaya further alleged that, even though Eastland  continued to be profitable, Eastland had not agreed to pay a dividend. Instead, Mekhaya alleged that Eastland continued to pay Oscar and some other family members very high salaries. Mekhaya recounted oppressive behaviors and diversion of income to Oscar and Vipa (Mekhaya’s mother). 

Mekhaya also sought compensatory damages for unjust enrichment related to the egregious  actions of Oscar and Vipa who “received excessive salaries and… diverted company funds  for their personal use and gain.” Mekhaya alleged that it would be inequitable to allow Oscar and Vipa to retain those benefits, which they received through their “wrongful course of  conduct and actions.” 

The Motion to Dismiss.

The appellees filed a joint motion to dismiss, claiming that Mekhaya  did not establish any “oppressive” conduct because he failed to rebut the “business  judgment” rule. They further claimed their decisions to terminate him and not to pay  dividends could not be oppressive “because Mekhaya did not establish the existence of any  shareholder or employment agreement conferring those rights to him.” 

Counsel for Mekhaya insisted that there was an understanding that Eastland would not pay dividends but that salaries would be inclusive of dividends. Thus, when Mekhaya was terminated and lost his salary, he lost his dividend as an owner also. 

The circuit court determined that there was not sufficient evidence that there was an  expectation of a dividend in Mekhaya’s salary so that, as to Count 1, there was no  oppression. The circuit court also dismissed Counts 2 and 3, noting that Mekhaya was an  at-will employee and that no harm was distinct and separate from the corporation and that  there was a presumption that the defendants acted in accordance with the business  judgment rule in the best interests of the company. 

All three counts were dismissed with prejudice. 

The Motion to Alter and Amend.

Mekhaya filed an amended complaint with additional  information as to his salary and why part of it was from the earnings of Eastland, i.e., a  dividend. The circuit court denied his motion to amend. 

Discussion. 

The shareholder oppression count. Here, the opinion itself speaks best to the issue as  follows: 

The Question … is whether Mekhaya’s complaint, on its face, alleged facts sufficient  to establish that his expectations as a shareholder were reasonable (when viewed  through an objective lens) and that Appellees defeated substantially one or more of  those expectations.  

Mekhaya’s complaint advanced such a showing. As noted earlier, 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. That expectation was reasonable, despite the fact that Eastland never declared officially a dividend. Thus, when  Appellees terminated Mekhaya’s employment and stopped paying his salary, thereby  depriving him of the de facto dividend portion, arguably Appellees defeated  substantially Mekhaya’s asserted reasonable expectation as a shareholder. Those  allegations are sufficient to state a claim for shareholder oppression. Again, whether  Mekhaya can prove those facts is immaterial to the stage of these proceedings as  they reach us here. 

In addition, Mekhaya alleged that, following the termination of his employment,  Eastland’s board of directors continued to refuse to declare expressly a dividend,  despite the fact that Eastland was “quite profitable.” According to Mekhaya, instead  of declaring a dividend, Eastland’s board chose to pay “excessively high salaries” to  Oscar and Vipa. Those actions, if proven, could be considered shareholder  oppression, particularly if the majority’s actions left Mekhaya with a “worthless asset.” 

[I]f Mekhaya can prove that Eastland had been paying a “constructive” or “de facto” dividend to its shareholders, employees or directors, that he reasonably expected to  receive that benefit, and that Appellees defeated substantially that expectation, the  court has the power to order “affirmative relief by the required declaration of a  dividend or a reduction and distribution of capital” and award “damages to minority  stockholders as compensation for any injury suffered by them as the result of  “oppressive” conduct by the majority in control of the corporation. 

The breach of fiduciary duty. The appellate court also held that the circuit court erred in  dismissing the claim for breach of fiduciary duty, stating that Mekhaya had failed to allege  direct harm separate from that the company incurred and failed to allege facts that could  overcome the business judgment rule. Both reasons were erroneous. 

In closely held corporations, the majority shareholders owed a fiduciary duty to the minority  shareholders. (Mona v. Mona Elec. Group, Inc.) A shareholder may bring an action directly  as an individual when the harm was directly to the shareholder. If the shareholder made  such a showing (of direct harm), then the business judgment rule did not apply. The  allegations in the complaint persuaded a direct harm to Mekhaya. “Mekhaya alleged that the  board breached that duty by refusing to pay that dividend out of Eastland’s ample profits,  instead using those profits to pay excessive salaries to Oscar and Vipa. He alleged also that  Oscar and Vipa used those same profits for personal use.” Any recovery would go directly  to Mekhaya.  

Mekhaya must still prove those claims of a de facto dividend in order to prove direct harm  to him as an individual. At this point in the proceedings, this was sufficient to survive a motion  to dismiss. 

Unjust enrichment. For many of the same reasons, the circuit court erred in dismissing  Mekhaya’s claims for unjust enrichment. A plaintiff needed to allege and then prove: (1) that  a benefit was conferred upon the defendant; (2) the defendant knew about the benefit; and  (3) it would be inequitable for the defendant to retain the benefit. Mekhaya’s “complaint sets forth the necessary elements of an unjust enrichment claim, and that claim should have survived the motion to dismiss.” 

Judgment of the circuit court for Howard County reversed; case remanded for further  proceedings consistent with this opinion.