Goldmark Friendship v. American Express , 304 F.3d 353 ( 2002 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
GOLDMARK FRIENDSHIP, LLC, a 
Nevada Limited Liability Company,
on behalf of PrimeHealth
Corporation in Receivership,
Plaintiff-Appellant,
v.  No. 01-2373
AMERICAN EXPRESS TAX AND
BUSINESS SERVICES, INCORPORATED;
WALPERT AND WOLPOFF, LLP;
JOHNSON LAMBERT AND COMPANY,
Defendants-Appellees.

GOLDMARK FRIENDSHIP, LLC, a 
Nevada Limited Liability Company,
on behalf of PrimeHealth
Corporation in Receivership,
Plaintiff-Appellant,
v.  No. 02-1132
AMERICAN EXPRESS TAX AND
BUSINESS SERVICES, INCORPORATED;
WALPERT AND WOLPOFF, LLP;
JOHNSON LAMBERT AND COMPANY,
Defendants-Appellees.

Appeals from the United States District Court
for the District of Maryland, at Baltimore.
Frederic N. Smalkin, Chief District Judge.
(CA-01-2344-S)
2 GOLDMARK FRIENDSHIP v. AMERICAN EXPRESS
Argued: May 7, 2002
Decided: September 20, 2002
Before WIDENER and MICHAEL, Circuit Judges, and
C. Arlen BEAM, Senior Circuit Judge of the United States Court
of Appeals for the Eighth Circuit, sitting by designation.
Affirmed by published opinion. Judge Widener wrote the opinion, in
which Senior Judge Beam joined. Judge Michael wrote an opinion
concurring in the judgment and concurring in part.
COUNSEL
ARGUED: Sunanda Kumari Holmes, Chevy Chase, Maryland, for
Appellant. James Patrick Ulwick, KRAMON & GRAHAM, P.A.,
Baltimore, Maryland, for Appellees. ON BRIEF: Laura Maroldy,
KRAMON & GRAHAM, P.A., Baltimore, Maryland; Kevin M. Mur-
phy, Alan Titus, CARR MALONEY, P.C., Washington, D.C., for
Appellees.
OPINION
WIDENER, Circuit Judge:
This case concerns the procedure under Maryland and federal law
for shareholders of a corporation in receivership to sue for allegedly
negligent or wrongful accounting practices by firms hired to audit the
corporation’s records.
I.
Goldmark Friendship LLC (Goldmark), the plaintiff, is the sole
shareholder of PrimeHealth Corp., a certified Health Maintenance
GOLDMARK FRIENDSHIP v. AMERICAN EXPRESS 3
Organization (HMO) and Managed Care Organization (MCO) orga-
nized under Maryland law.1 In March 1998, the Maryland Insurance
Commissioner directed the Maryland Insurance Administration to
investigate the financial viability of PrimeHealth. The report of the
Administration first noted discrepancies in PrimeHealth’s accounts
receivables and liabilities, which had allowed PrimeHealth to qualify
for HMO and MCO status under Maryland law,2 and also indicated
that PrimeHealth had misrepresented its relationships with various
business entities and used funds in connection with those businesses.
Based on this report, the Commissioner sought to have himself
appointed receiver for PrimeHealth. PrimeHealth initially demanded
a hearing to contest this report, but then signed an order authorizing
appointment of the Commissioner as receiver before that hearing was
held. The Baltimore City Circuit Court placed PrimeHealth in receiv-
ership, appointing the Commissioner as receiver.3
The present suit originated with action taken by the receiver to
evaluate PrimeHealth’s financial status.4 The receiver retained Wal-
pert & Wolpoff (Walpert), an accounting firm owned by American
Express Tax and Business Services to audit PrimeHealth as of
December 31, 1998. He employed Johnson Lambert and Co. to per-
form the same audit for 1999. Goldmark alleges the following against
Walpert. First, Walpert had a conflict of interest because it was
1
Dr. Christian C. Chinwuba and his wife own roughly an 80 percent
interest in Goldmark.
2
The report indicated that PrimeHealth had overstated its accounts
receivable and understated its liabilities.
3
The Baltimore City Circuit Court issued an order adopting and
finalizing the report of the Administration and dismissing Goldmark’s,
PrimeHealth’s, and Dr. Chinwuba’s petitions for circuit court judicial
review which was affirmed in PrimeHealth Corp. v. Ins. Comm’r, 758
A.2d 539 (Md. App. 2000).
4
Goldmark, PrimeHealth, and Dr. Chinwuba have brought various
lawsuits. These actions concern, but are not limited to, the appointment
of the Commissioner as receiver; defamation, invasion of privacy, and
Constitutional violations by the Commissioner; impartiality by the Balti-
more City Circuit Court judge; the validity of PrimeHealth’s consent to
receivership; and termination of the receivership proceedings. None of
these actions are presently before this court.
4 GOLDMARK FRIENDSHIP v. AMERICAN EXPRESS
already under contract with the Administration and the Commissioner
to audit other Maryland HMO’s and MCO’s. Second, this conflict
induced Walpert to perform PrimeHealth’s audit without utilizing
generally accepted accounting procedures and generally accepted
auditing standards, ultimately rendering PrimeHealth insolvent. Third,
apart from its desire to retain the Administration’s independent audit-
ing contract, the motivation for Walpert’s wrongful conduct was
racial bias, since both PrimeHealth and Goldmark were African-
American owned companies. Goldmark makes the same allegations,
except the racial bias claim, against the firm hired to perform the
1999 audit, Johnson Lambert and Company. In addition, Goldmark
claims that Johnson Lambert, aware of Walpert’s negligence, failed
to disclose any wrongdoings to Walpert, PrimeHealth, or the receiver.
II.
A brief procedural history of this case follows. In mid-April 2001,
Goldmark directly sued Walpert and Johnson Lambert. On June 26,
2001, the district court dismissed the case with prejudice under Rule
12(b)(6) for failure to state a claim; however, the order noted that it
did "except to the extent the plaintiff purports to maintain a derivative
claim, which is dismissed without prejudice to refiling after demand
will have been made on the Receiver."
Goldmark filed the present derivative action in early August 2001.
Section III, paragraph nine of this complaint reads: "Goldmark made
a demand on PrimeHealth’s Receiver to sue the defendants herein,
however, he refused to do so." This allegation is corroborated by a
line filed in the Baltimore City Circuit Court. On September 21, 2001,
Walpert, American Express, and Johnson Lambert moved to dismiss
the complaint. On October 17, 2001, the district court granted defen-
dants’ motions to dismiss for failure to state a claim upon which relief
can be granted pursuant to Rule 12(b)(6), stating that plaintiff failed
to illustrate a violation of the business judgment rule and that there
was no allegation that the receiver’s failure to bring suit had been
brought to the attention of the Maryland court overseeing the receiv-
ership, another requirement for bringing a suit such as this. Motions
for reconsideration were denied on November 12, 2001.
On appeal Goldmark asks that we reverse the judgment of the dis-
trict court, arguing along the way that it erred in denying the motions
GOLDMARK FRIENDSHIP v. AMERICAN EXPRESS 5
for reconsideration and denying leave to file an amended complaint.
We affirm the district court’s decision to dismiss the case but empha-
size that our dismissal is not a decision on or an expression of opinion
with relation to the merits of the claim that Goldmark seeks to deriva-
tively assert against Walpert and Johnson Lambert. We discuss the
decision to dismiss the case but because the amended complaint does
not allege that Goldmark has petitioned the Baltimore City Circuit
Court, which is the receivership court, to prosecute its claim against
Walpert and Johnson Lambert, the motion of Goldmark to amend its
complaint is patently without merit and we so hold.
As noted, PrimeHealth was adjudged to be in receivership by the
Circuit Court of Baltimore City October 1, 1998, and the Maryland
Commissioner of Insurance was appointed receiver by that court. That
action was affirmed by the Maryland Court of Special Appeals in
PrimeHealth Corp. v. Ins. Comm’r, 758 A.2d 539 (Md. App. 2000).
The order appointed the Commissioner "as receiver for the purpose
of rehabilitation of . . . PrimeHealth . . . ." The order stated, among
other things:
2. The receiver shall have the powers and duties vested
in him by the provisions of Title 9 . . . Annotated Code of
Maryland . . . and shall forthwith take possession of the
property of defendant and shall conduct the business thereof
under the general supervision of the court . . . .
The claims derivatively asserted by Goldmark against Walpert and
Johnson Lambert are claims of the corporation not the claims of
Goldmark itself. They are rights of action and a part of the property
of the corporation. We see no difference between this suit of the cor-
poration against its employees Walpert and Johnson Lambert and the
suit of a corporation against its officers for misappropriation of its
property. In such a case, the Supreme Court held the claim "is a right
of the corporation" and continued "[t]he whole property of the corpo-
ration within the jurisdiction of the court which appointed the
receiver, including all its rights of action, except so far as already law-
fully disposed of under orders of that court, remains in its custody, to
be administered and distributed by it. Until the administration of the
estate has been completed and the receivership terminated, no court
of the one government can by collateral suit assume to deal with
6 GOLDMARK FRIENDSHIP v. AMERICAN EXPRESS
rights of property or of action, constituting part of the estate within
the exclusive jurisdiction and control of the courts of the other." Por-
ter v. Sabin, 149 U.S. 473, 478, 479 (1893).
The Court in Porter affirmed the federal circuit court which had
dismissed the case in which the state court, which appointed the
receiver, had denied a petition for stockholders to prosecute the claim
against the officers of the corporation. And the Porter Court stated
"[i]t is for that [receivership] court, in its discretion, to decide whether
it will determine for itself all claims of or against the receiver, or will
allow them to be litigated elsewhere. It may direct claims in favor of
the corporation to be sued on by the receiver in other tribunals
. . . ." 149 U.S. at 479.
The same result was obtained in the case of Wabash R. Co. v. Adel-
bert College, 208 U.S. 38 (1908), in which an Ohio state court had
authorized foreclosure of a mortgage on the property of the railway
which was in receivership in a circuit court of the United States. In
the Wabash case the Court reasoned "[w]hen a court of competent
jurisdiction has, by appropriate proceedings, taken property into its
possession through its officers, the property is thereby withdrawn
from the jurisdiction of all other courts. The latter courts, although of
concurrent jurisdiction, are without power to render any judgment
which invades or disturbs the possession of the property while it is in
the custody of the court which has seized it." 208 U.S. at 54. "Those
principles [with respect to receivership] are of general application and
not peculiar to the relations of the courts of the United States to the
courts of the states; they are, however, of especial importance with
respect to the relations of those courts, which exercise independent
jurisdiction in the same territory, often over the same property, per-
sons, and controversies; they are not based upon any supposed superi-
ority of one court over the others, but serve to prevent a conflict over
the possession of property, which would be unseemly and subversive
of justice; and have been applied by this court in many cases . . . ."
208 U.S. at 54.
Maryland law is the same. In Pritchard v. Myers, 197 A. 620 (Md.
1938), a bank was in receivership and certain creditors and depositors
of the bank sued directors of the bank charging neglect in the dis-
charge of their duties. The complaint charged that the receiver of the
GOLDMARK FRIENDSHIP v. AMERICAN EXPRESS 7
bank had been requested to proceed against the directors but had
refused to act. That same situation pertains here. The Maryland court
held that the derivative suit of the bank against its directors prose-
cuted by the plaintiffs could not be maintained. The Court recited that
the "bill of complaint attempts to justify its inception on the allegation
that the receiver had been requested, but refused, to institute an action
against the directors for the benefit and reimbursement of the deposi-
tors and creditors." 197 A. at 626. The Court’s holding is in plain
English and is a decision on the same facts present here. It is:
The Court is of the opinion that these allegations are insuffi-
cient. The receiver is the officer of the court, and acts under
its supervision and by its direction. The refusal of the
receiver was not the act of the court, but was subject to the
court’s review and control. The plaintiffs at bar are not
shown to have invoked the court’s consideration and deci-
sion. Nor does the appeal that the receiver’s refusal was
brought to the court’s attention. The orderly course is to
present the question on petition and hearing in the pending
receivership cause. And thus obtain the court’s judgment
and order.
197 A. at 626. And the Maryland Court of Special Appeals in Tafflin
v. Levitt, 608 A.2d 817 (Md. App. 1992), followed Pritchard and held
that in such a case, to maintain a derivative suit for the benefit of the
corporation in receivership, a demand on the receiver and a petition
of the receivership court are applicable. 608 A.2d at 820.
Accordingly because the plaintiff did not petition the receivership
Maryland court to require the receiver to prosecute the derivative
action it now seeks to prosecute, the judgment of the district court is
AFFIRMED.5
5
Just as the district court correctly held that merely requesting the
receiver to prosecute this suit, and his refusal of the request, is of itself
an insufficient reason to permit this case to continue, the Pritchard case
so holds. We emphasize that we do not decide that merely filing a peti-
tion in the receivership Maryland court is a sufficient predicate for per-
8 GOLDMARK FRIENDSHIP v. AMERICAN EXPRESS
MICHAEL, Circuit Judge, concurring in the judgment and concurring
in part:
I concur in the judgment. In addition, I readily join in the majori-
ty’s opinion to the extent it holds that Maryland law required Gold-
mark Friendship, L.L.C. to petition the state receivership court for an
order directing the receiver to bring the derivative action that Gold-
mark seeks to prosecute itself. I respectfully decline to join the gen-
eral discussion about whether federal courts can exercise authority
over property that is under the supervision of a state receivership
court.
mitting this case to proceed in this court. As Porter v. Sabin, supra, and
Wabash R. Co. v. Adelbert College, supra demonstrate, even such a peti-
tion and its refusal by action of the receivership court may well not be
sufficient predicates upon which to rest this derivative action asserting a
right of action belonging to the receiver. Indeed, in Wabash R. Co. the
Court stated: "The defendants in error [plaintiff here] must pursue their
remedy in that [receivership] court, which doubtless will consider the
decisions of the state courts on questions of state law with the respect
which the decisions of this court require." 208 U.S. at 57.