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Ross v. Fierro

June 1, 1995


Appeal from the Superior Court of the District of Columbia. (Hon. Harold L. Cushenberry, Jr., Trial Judge).

Before Ferren, Schwelb, and Farrell, Associate Judges.

The opinion of the court was delivered by: Schwelb

SCHWELB, Associate Judge: After a business venture among two then-friendly couples went sour, the former friends quarrelled about who should bear the loss. This lawsuit resulted, and following a bench trial, the Judge held that appellants Howard and Terry Ross, who are husband and wife, were not entitled to recover damages from appellee Manuel Fierro, either for breach of contract or as equitable contribution. On appeal, the Rosses contend primarily that the trial Judge failed to apply correct legal principles to the evidence of record. We agree with the Rosses with respect to their claim for contribution. Accordingly, we affirm in part, reverse in part, and remand for further proceedings.



In December 1984, the Rosses, together with Manuel Fierro and his then-wife, Elaine, began a retail business in upscale children's clothing under the trade name "Twinkles." They opened a store in Chevy Chase, Maryland. The business was incorporated, and each of the four principals contributed $10,000 in return for a 25% interest in the company. The parties filed a "subchapter S" election with the Internal Revenue Service pursuant to 26 U.S.C. §§ 135 et seq. Under this arrangement, corporate losses may be deducted on the stockholder's personal income tax return.

In the years that followed, the stockholders took out several loans from various lending institutions and, in turn, lent the money to the corporation. In late March 1988, the stockholders borrowed $150,000 from First American Bank of Virginia (the "Old Loan") in order to pay off an earlier note to another bank. The "Old Loan" was to come due in April 1989. Both Rosses and both Fierros were personally liable on the "Old Loan." During 1988, Twinkles also leased space at Tysons Corner, Virginia, with a view to opening a second store.

In early February 1989, Elaine Fierro advised the Rosses that she was leaving her husband; she claimed that Manuel Fierro was abusing her and the couple's young son. Mrs. Fierro asked the Rosses not to tell her husband of her plans, so that she could accomplish the departure smoothly. Howard Ross, who is an attorney, *fn2 honored this request and also provided advice to Mrs. Fierro with regard to the selection of an attorney. Marked hostility developed between Howard Ross and Manuel Fierro when Elaine Fierro left for Florida with her son and her husband learned of Howard Ross' actions.

Meanwhile, the "Old Loan" was soon to become due. The business had suffered some reverses, and no funds were available to redeem the note. Howard Ross discussed the matter with both Fierros. An amicable agreement was reached with Elaine Fierro, who agreed to transfer her share of the business to the Rosses in exchange for their assumption of her share of the liability on the "Old Loan." First American apparently agreed to this arrangement, so that the Rosses now owned 75% of the business but had also assumed 75% of the company's liabilities. The Rosses were unable, however, to reach a mutually satisfactory accommodation with Manuel Fierro, and their inability to do so led to the present litigation.

Shortly after Elaine Fierro left her marriage, Howard Ross and Manuel Fierro had several apparently acrimonious conversations regarding how to deal with the company's liability. They were unable to settle their differences. Howard Ross discussed taking out a new loan in order to repay the "Old Loan." Fierro testified that he told Howard Ross that "I don't want to be a signer on any document that I could be personally liable for" - obviously a reference to a new loan - and that

there was a Discussion that they would take care of it. Nothing that it's due, you got to pay, that sort of thing....

The Rosses eventually took out a new loan from First American on which only they were liable. Howard Ross testified that

I told that he was off the bank loan, but I also made it clear to him that I did not consider him released from his liability to me, both because we had always agreed that it would be proportionate because I paid off the loan that he was liable on.

Ross thus evidently believed that the loan that Manuel Fierro was "off" was not the "Old Loan," but rather the new one.

In his findings of fact, the trial Judge wrote:

Fierro testified credibly that he had, at least, several Discussions with Ross concerning the loan/line of credit and that Ross advised him that he did not "have to worry" about the line of credit since the Rosses were going to take it over. Fierro believed and accepted Ross' statements to be true. ...

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