Konstand v. Prime Group Realty Trust

Prime Group Realty Trust (PGRT) (defendant) was a real estate investment trust organized in Maryland that issued common stock and preferred stock. PGRT’s articles of incorporation entitled preferred shareholders to receive fixed quarterly dividends and prohibited the payment of common-share dividends unless PGRT had paid all preferred dividends owed. Dean Konstand (plaintiff) acquired PGRT preferred shares in October 2004. In July 2005, Prime Office, a wholly owned subsidiary of Lightstone, acquired all of PGRT’s common shares. At that time, PGRT’s board of directors consisted of PGRT’s president, three Lightstone corporate officers, and three independent members. Further, PGRT had a cash balance of $70 million. During the same month, the board of directors paid $30 million as a common dividend distribution to Prime Office. In January 2006, PGRT obtained loans totaling $113 million. The following month, PGRT paid a second dividend of $76 million to Prime Office. In 2008, PGRT paid a third dividend of $15 million to Prime Office. Konstand subsequently filed a derivative claim against PGRT alleging that the three common dividend distributions constituted a breach of fiduciary duty through corporate waste and bad faith. Konstand supported his claim with Securities and Exchange Commission (SEC) filings in 2011 regarding the control of PGRT, the fact that most of the board members were not independent, and PGRT’s operating losses and insufficient cash resources. After affording Konstand a chance to amend the complaint, the trial court found that Konstand failed to allege sufficient facts to show that the dividend payments caused PGRT to become insolvent in violation of Maryland’s dividend statute and therefore dismissed Konstand’s claim with prejudice. Konstand appealed and argued that the dividend distributions constituted a breach of fiduciary duty whether or not the statute was violated.