Friday, February 3, 2017

Charles and Margaret Levin Family Limited Partnership v. Greenberg Family Limited Partnership (Cir. Ct. Mont. Cnty)

Filed:  December 27, 2016

Opinion by:  Ronald B. Rubin

Holding:  Judicial dissolution is an inappropriate remedy for deadlock over the identity of a managing member of an LLC where an LLC’s members have (1) a reasonable exit mechanism to receive fair value for their interest and (2) the Operating Agreement provides an alternative dispute resolution mechanism such as arbitration.

Facts:  Plaintiff and Defendant, each a family limited partnership involved in a series of commercial real estate transactions since the late 1980’s, jointly operated a lucrative office and retail complex.  Originally a general partnership, the joint venture’s organizational structure in 1999 converted to an LLC whose members were Plaintiff and Defendant, each with a 50% stake.

The Operating Agreement provided that Defendant would be the managing member with an initial 5-year term, followed by one or more successive 3-year terms if members unanimously consented to each successive term.  Expiration of the initial term was met with acquiescence by both parties, and Defendant continued to serve as managing member of the LLC.

By 2013, operation of Plaintiff’s family business had passed through several hands and a separation of interests was proposed.  Negotiations were contentious and unsuccessful.  By late 2014, Plaintiff accused Defendant of material breach of the operating agreement, alleging improper authorization of an increased property management fee and exceeding its term as managing member without consent.  At a members’ meeting, Defendant agreed not to increase the management fee, but refused to step aside as managing member.

Pursuant to the Operating Agreement, Plaintiff in 2014 filed a demand for arbitration to remove Defendant as managing member.  Defendant filed a complaint in circuit court seeking a declaratory judgment that the matter was not subject to arbitration.  Each party then withdrew their demands and attempted to negotiate a resolution.  Negotiations ultimately failed, and Plaintiff filed the instant suit in mid-2015.

Plaintiff sought relief in the form of a declaration that Defendant’s term as managing member had expired, and judicial dissolution of the LLC.  Defendant generally denied the allegations, sought a declaration that Defendant could remain as managing member, and requested that judicial dissolution be found an inappropriate remedy in such a dispute.

In March 2016, the court denied cross-motions for summary judgment and set a trial date for November.  By June, Plaintiff filed an amended complaint alleging the parties were deadlocked, and moved for a preliminary injunction for Defendant’s removal as managing member.  Plaintiff again requested judicial dissolution, but alternately requested appointment of a special fiscal agent.

At a preliminary injunction hearing in July, the court granted the motion in part, ordering removal of Defendant as managing member, but denied the request for judicial dissolution.  At the hearing, the court learned that the property management firm, although an affiliate of Defendant, had run day-to-day operations for over fifteen years without serious complaint.  The court found the parties’ unaddressed disagreements to be premised on the unsuccessful attempts to wind up the business, and allowed the property management firm to carry on in conformity with the Operating Agreement despite absence of a managing member.

In October, Defendant moved again for summary judgment, arguing that its removal as managing member rendered the complaint moot, and that any remaining operational or management disputes could be resolved by pursuing arbitration according to the Operating Agreement.  The court denied the motion in favor of full examination of the parties’ relationship, motive, and intent.

Analysis:  The court began by evaluating Plaintiff’s contention that judicial dissolution was the only remedy in light of the fact that without a managing member, the LLC could neither operate generally, nor operate in conformity with its Operating Agreement.  Examining the Operating Agreement, the court found several sections reserving sole authority to bind the LLC to the Managing Member or its specially authorized agents.  Further, the Operating Agreement plainly stated that mere status as a member did not vest with capacity to bind the LLC.  Noting that the practice of stockholders running a corporation might vitiate the protections of the corporate shield, the court concluded that leaving Plaintiff and Defendant as mere members would be improper.  Nor was the property management firm an appropriate substitute for a Managing Member.

The court went on to cite Maryland statutory law, noting that while judicial dissolution is appropriate only when “it is not reasonably practicable to carry on the business in conformity with the articles of organization or the operating agreement,” the statute failed to adequately define the phrase.  Md. Code Ann. Corps & Assn’s Art. §4A-903 (2015).  Nor had Maryland courts definitely construed the statutory language.  The court therefore looked to extent to which deadlock frustrated the purpose to which the LLC was created.  Finding Defendant, as prior Managing Member, had not abused its authority, unjustly enriched itself, or harmed Plaintiff’s economic interests, the court determined the business purpose of the LLC to have been faithfully fulfilled.

The court countenanced that judicial dissolution might have been appropriate but for the fact that the Operating Agreement specifically provided for arbitration as a dispute resolution mechanism.  Although Defendant reversed its initial pre-trial position that appointment of a managing member was not a proper subject of arbitration, Plaintiff failed to argue that Defendant was judicially estopped from taking this position.  Regardless, the court stated that because both parties’  2014 filings had been withdrawn voluntarily prior to the instant suit, judicial estoppel would not have precluded Defendant from taking such a stance.

Finding no ambiguity in the Operating Agreement’s dispute resolution mechanism, the court deemed judicial dissolution to be unnecessary.  The court went on to comment that the Operating Agreement also provided a reasonable exit mechanism in a dissenting member’s ability to exit and receive the fair value of its interest.  Subject to a right of first refusal with notification requirements, Plaintiff could have solicited offers for its interest, but failed to do so.  Further, Defendant in 2015 offered 50% of the appraised value of the joint venture.  Finding the price to be a premium over fair market value (given the limited marketability and/or lack of controlling interest), the court was satisfied in denying the request for judicial dissolution, finding arbitration to be a fair and equitable result.

The full opinion is available in PDF.

Tuesday, January 31, 2017

Stewart v. Jayco, Inc. (U.S.D.C.)

Filed: January 18, 2017

Opinion by: Ellen L. Hollander, United States District Judge

Holding:

In finding that no personal jurisdiction exists, the Court follows Maryland Court of Appeals precedent, applying a two-part test: (1) whether the requirements of Maryland’s long-arm statute are satisfied; and (2) whether the exercise of personal jurisdiction comports with the requirements imposed by the Due Process Clause of the Fourteenth Amendment.

Facts:

Plaintiffs  are Maryland residents who, on August 29, 2015, purchased a 2016 Jayco Seneca Motorhome from Camping World RV Super Center, a dealer located in Fountain, Colorado. Plaintiffs paid $153,081.90 for the Motorhome, which they allege has “been plagued by non-stop problems arising from defects in the manufacturing of the vehicle,” arguing violations of the Magnuson-Moss Warranty Act. Camping World RV Sales in Hanover, Pennsylvania and Camping World RV Super Center in Fountain, Colorado serviced the vehicle.

Defendant manufactured the Motorhome in question. Defendant relies on a declaration by Craig Newcomer, Consumer Affairs Manager of “Jayco Motorhome Group,” arguing Defendant has no ties to Plaintiff or the state of Maryland. Newcomer avers that Jayco does not maintain an office in Maryland; does not have any employees in Maryland; does not own any real estate in Maryland; has no bank accounts in Maryland; and does not directly advertise in Maryland. In addition, Defendant asserts it is not licensed to do business in Maryland and does not “directly” pay any taxes in Maryland.

In alleging that Defendant is transacting business in Maryland, Plaintiff relies on the fact that Defendant has a dealer in Maryland and that Defendant maintains a website that directs customers to dealers operating within Maryland. According to Newcomer, Defendant’s dealers are independently owned and operated and there is only one dealer in Maryland, (Chesaco) which holds three locations in Maryland, and with whom Plaintiffs never interacted.

Analysis:
           
 Reviewing the facts in a light most favorable to the Plaintiff, the Court addresses the issue of personal jurisdiction as a preliminary matter, determining whether the Plaintiff made his requisite prima facie showing. Furthermore, a threshold prima facie finding that personal jurisdiction is proper does not finally settle the issue; plaintiff must eventually prove the existence of personal jurisdiction by a preponderance of the evidence, either at trial or at a pretrial evidentiary hearing.

According to Fed. R. Civ. P. 4(k)(1)(A), a federal district court may exercise personal jurisdiction over a defendant in accordance with the law of the state in which the district court is located. Thus, the Court looked to Maryland law, which provides, “to assert personal jurisdiction over a nonresident defendant, two conditions must be satisfied: (1) the exercise of jurisdiction must be authorized under the state’s long-arm statute; and (2) the exercise of jurisdiction must comport with the due process requirements of the Fourteenth Amendment.” Carefirst of Maryland Inc. v. Carefirst Pregnancy Ctrs., Inc., 334 F.3d at 396; Carbone v. Deutsche Bank Nat’l Trust Co., No. CV RDB-15-1063, 2016 WL 4158354, at *5 (D. Md. Aug. 5, 2016).
           
Relying on Carbone, the Court held “when interpreting the reach of Maryland’s long-arm statute, a federal district court is bound by the interpretations of the Maryland Court of Appeals.” See Carbone, 2016 WL 4158354 at *5. “The Maryland Court of Appeals has ‘consistently held that the reach of the long-arm statute is coextensive with the limits of personal jurisdiction delineated under the due process clause of the Federal Constitution’ and that the ‘statutory inquiry merges with the constitutional examination.’” See Beyond Systems, Inc. v. Realtime Gaming Holding Co., 388 Md. 1, 22, 878 A.2d 567, 580 (2005). While the Maryland Court of Appeals recognizes a two-step analysis is standard, the Maryland Court of Appeals, and thus this Court, also recognize that, in some situations, exceptions exist wherein courts may decline to consider the first step if the analysis of the second step demonstrates conclusively that the personal jurisdiction over the defendant would violate due process. See Bond v. Messerman, 391 Md. 706, 721, 895 A.2d 722, 895 (2006). According to the Court, this case falls within this exception.

In evaluating whether a nonresident defendant is subject to personal jurisdiction under due process requirements, the Court looks to the United States Supreme Court, which has long held that personal jurisdiction over a nonresident defendant is constitutionally permissible so long as the defendant has “minimum contacts with [the forum state] such that the maintenance of the suit does not offend ‘traditional notions of fair play and substantial justice.’” International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). Courts have separated this test into two individual prongs: (1) the threshold of “minimum contacts,” and (2) whether the exercise of jurisdiction on the basis of those contacts is “constitutionally reasonable.” Due process jurisprudence recognizes “two types of personal jurisdiction: general and specific. CFA Inst. V. Inst. Chartered Fin. Analysts of India, 551 F.3d 285, 292 n. 15 (4th Cir. 2009). The Court determines that Defendant is not subject to general or specific personal jurisdiction, and as a result, the Court grants Defendant’s Motion to Dismiss.

In concluding no general personal jurisdiction exists, the Court relies on the rule from Goodyear, which states a court may exercise general jurisdiction over foreign corporations to hear “any and all claims” against the corporations “when their affiliations with the State are so ‘continuous and systematic’ as to render them essentially at home in the forum State.” Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915, 919 (2011). The Court also relies on Daimler, where plaintiffs sought to exercise general personal jurisdiction over defendant in California. Citing Burger King, the court of Daimler explained that Daimler, defendant, was neither incorporated in California nor did it maintain its principal place of business in California, and thus, “such exorbitant exercises of all-purposes jurisdiction would scarcely permit out-of-state defendants ‘to structure their conduct with some minimum assurance as to where that conduct will and will not render them liable to suit.’” Daimler AG v. Bauman, 134 S.Ct. 760 (2014).

In light of the facts at hand, the Court argues, “although Plaintiffs point to some contacts that Defendant maintains with Maryland, those contacts are not so continuous and systematic as to ‘render [Defendant] essentially at home in the forum state.’” Goodyear, 564 U.S. at 919. In addition, the court heavily relies on the fact that Defendant is not incorporated in Maryland; it is not registered and qualified to do business in Maryland; it has no employees in Maryland; and it does not maintain an office in Maryland. Regarding the Maryland dealership, the Court notes Chesaco also sells other brands of recreational vehicles, and that Defendant only passively directs customers in Maryland to purchase its products from Chesaco. Chesaco is independently owned and operated. For the above reasons, the Court ultimately concludes no general personal jurisdiction exists.

To determine whether there is specific jurisdiction over a defendant, the Court considers: “(1) the extent to which the defendant purposefully availed itself of the privilege of conducting activities in the state; (2) whether the plaintiffs’ claims arise out of those activities directed at the State; and (3) whether the exercise of personal jurisdiction would be constitutionally reasonable.” Consulting Eng’rs Corp. v. Geometric Ltd., 561 F.3d at 278 (4th Cir. 2009). The Court further relies on Burger King, where the court explains, “the ‘benchmark’ is not the ‘foreseeability of causing injury in another state.’ Rather, it is ‘foreseeability . . . that the defendant’s conduct and connection with the forum State are such that he should reasonably anticipate being haled into court there.’” Burger King Corp. v. Rudzewicz, 471 U.S., at 474 (1985).

Here, the Court finds no specific personal jurisdiction. The Court bases its determination on the fact that Plaintiffs did not purchase their Motorhome from or through Defendant’s Maryland dealer, nor did Plaintiff allege that they used Defendant’s website or that Defendant was in any way involved with Plaintiff’s decision to purchase a Jayco Motorhome in Colorado. Furthermore, the Court notes that after Plaintiffs bought the Motorhome in Colorado, they had it serviced and repaired in Pennsylvania. Plaintiffs failed to allege that any contacts between Defendant and the state of Maryland are related to, or give rise to, the cause of action. For the foregoing reasons, the Court concluded no specific personal jurisdiction exists.

In sum, although Defendant has some contacts with the state of Maryland, Plaintiff failed to establish that such contacts satisfy its prima facie requirement for either general or specific jurisdiction to support a finding of this Court’s personal jurisdiction over Defendant.

The opinion is available in PDF. 

Monday, January 30, 2017

Oliveira v. Sugarman (Ct. of Appeals)

Filed: January 20, 2017

Opinion by J. Adkins

Holding:  (1) The traditional business judgment rule applies to a disinterested and independent board of directors' refusal of a stockholder litigation demand, not the modified business judgment rule established in Boland v. Boland, 423 Md. 296 (2011). (2) Conversion of a performance-based incentive plan approved by stockholders to a service-based incentive plan approved by a board of directors does not give rise to a direct stockholder claim. (3) An incentive plan approved by stockholders does not constitute a contract unless such plan contains language "indicating a clear offer and intent to be bound." (4) Even when a corporation owes a direct duty to its stockholders, a stockholder must have suffered an injury distinct from the corporation to bring a direct claim.

Facts:  The board of directors of a Maryland corporation (the "Company") granted performance-based restricted stock (the "Original Awards") to certain of its executives and employees; however, the Company did not have enough common stock authorized to pay these Original Awards if they vested. In a letter to stockholders from the CEO, accompanied by the annual proxy statement, the CEO asked stockholders to approve the proposed long-term incentive plan (the "Plan"). The mailing also included a copy of the Plan, which authorized the issuance of an additional eight million shares of common stock. The Plan was approved at the annual meeting. The Company, however, did not meet the performance metrics for the Original Awards to vest until eight trading days past when the Original Awards were to vest. The board of directors and its compensation committee, in consultation with its advisors, decided to convert the Original Awards to service-based awards (the "Modified Awards") to balance rewarding management’s performance and enforcing the terms of the Original Awards.

Plaintiffs, trustees of a stockholder of the Company, made a demand to the board of directors to investigate the Modified Awards and institute claims on behalf of the Company against "responsible persons." The board of directors appointed an outside, non-management director to serve as the demand response committee. After investigation that included assistance from outside counsel, the demand response committee recommended the board of directors refuse the stockholder demand, which it did after a unanimous vote. Plaintiffs filed suit against the members of the board of directors and senior management alleging breach of fiduciary duty, unjust enrichment, waste of corporate assets, breach of contract and promissory estoppel arising from the Modified Awards. The Court of Special Appeals affirmed the trial court’s dismissal of Plaintiffs’ claims, holding that the trial court correctly applied the business judgment rule and Plaintiffs’ failed to plead facts sufficient to overcome the presumption of the business judgment rule.

Analysis: The Court refused to expand the modified business judgment rule established in Boland to all board of director decisions refusing a stockholder litigation demand, regardless of whether a majority of the directors are disinterested or the board used a special litigation committee ("SLC"). After a discussion of the development of the business judgment rule in Maryland, the Court distinguished this case from Boland because a majority of the board of directors of the Company were disinterested and independent as only one of the six directors at the time the Amended Awards were made actually stood to financially benefit from the board's decision (even Plaintiffs agreed that the board consisted of a majority of disinterested and independent directors when it approved the Amended Awards). Plaintiffs argued that, by refusing to extend the modified business judgment rule to any denial by a board of directors of a stockholder litigation demand, enhanced scrutiny by the courts would be limited "to those rare instances when shareholders are not required to make a demand on the board before bringing suit" and thus the modified business judgment rule would be rarely applied. The Court explained that Boland was not concerned with the feasibility of stockholder derivative suits and was intended to address those situations where a board of directors does not have a disinterested majority and appoints an SLC because the courts wanted to ensure the SLC was not "serving as a puppet for the interested board."

Turning next to whether the claims asserted by Plaintiffs were direct or derivative, the Court held that Plaintiffs did not suffer "a 'distinct injury' separate from any harm suffered by the corporation." Plaintiffs claimed they suffered three harms giving rise to a direct claim. First, they claimed to have suffered harm when the Original Awards were converted to the Modified Awards because the Company could no longer take advantage of the tax exemption provided for under § 162(m)(4)(C) of the Internal Revenue Code because, unlike the Original Awards, the Modified Awards were no longer made in connection with a stockholder-approved performance plan. Even though the Court noted that this alleged increased tax cost actually resulted in damages to the Company, not Plaintiffs’, they maintained that the Plan granted them contact rights that they could enforce directly. Applying New York law (the Plan was approved in New York and expressly provided it was governed by New York law), the Court held that the Plan was not a contract because it contained no offer to stockholders. The Court also held that, under Maryland law, the Plan was not part of a larger "intra-corporate contract" between directors and stockholders.

Second, Plaintiffs claimed as a direct harm that the actions of the board of directors caused them to make an uninformed vote. Relying on the doctrine of promissory estoppel, Plaintiffs argued that the board promised them the Original Awards would vest only if the performance metrics outlined in the Plan were met and that this promise induced Plaintiffs to vote to approve the Plan. The Court acknowledged that the language in the letter to stockholders that accompanied the proxy statement did urge approval of the Plan and stated that the Original Awards would vest "only if performance conditions are achieved." The proxy statement contained the same assurance and, the Court found that "[t]his language could constitute a clear and definite promise on the part of the Board." The Court also found that the board of directors had a reasonable expectation that its promises to stockholders regarding the vesting of the Original Awards would induce stockholders to approve the Plan because, in language in the letter to stockholders, the board stated its belief that "the significant shareholder returns required in order to meet the performance hurdles of these proposed equity incentive awards…make the overall compensation strategy a compelling one for shareholders." Further, the stockholders did in fact approve the Plan. However, the Court held that Plaintiffs’ were unable to meet the fourth element of their promissory estoppel claim. Looking to Delaware law, the Court held that casting an uninformed vote in and of itself is not sufficient harm to support a claim for promissory estoppel – Plaintiffs’ would need to show individual damages resulting from their uninformed vote, which they had not done.

Plaintiffs next claimed that they suffered a direct harm because the Plan diluted the value of their shares in the Company. The Court agreed that, under certain circumstances, "financial harm due to stock dilution could support a direct shareholder claim"; however, the Court held that such a circumstance did not exist in this case. Plaintiffs had not alleged share dilution in their complaint and, while they argued dilution on appeal, they failed to allege any facts detailing the financial or other impact of the alleged dilution.

Finally, Plaintiffs claimed that, even if they had not suffered a distinct harm, the Plan created a direct duty owed to stockholders by the board of directors and thus they should be able to bring a direct claim. While the Court acknowledged that a stockholder may bring a direct action if the board of directors breached a duty owed to stockholders, it held that the breach of duty alone is not sufficient to bring a direct claim – there must be some separate harm suffered. Therefore, to bring a direct claim, a stockholder would have to show that it suffered a harm distinct from the corporation as a result of the breach of duty owed by directors to stockholders.

The full opinion is available in PDF.  The author of this post is an attorney at Venable LLP, which represented the Company.  

St. Paul Mercury Insurance Company v. American Bank Holdings, Inc. (4th Circuit)

Filed: April 14, 2016

Opinion by: Niemeyer

Holding:  Service of process on a Maryland corporation’s resident agent constitutes service of process on the corporation.

Facts:  Defendant’s resident agent was served with a complaint and summons issued from a state court in Illinois on June 18, 2008.  Due to an internal oversight, defendant did not respond to the summons and the court entered a default judgement against it.  Eight months after receipt of the summons and after efforts to collect on the default judgment began, defendant notified its insurer of the lawsuit. 

The insurance policy provided that the insurer must be given written notice of any “claim … as soon as practicable.”  The policy also provided that a claim commenced on “the service of a complaint.”  Insurer denied coverage because of the late notice.  

Defendant eventually had the default judgment vacated and the lawsuit dismissed, which cost defendant $1.8 million.  Insurer sought a declaratory judgment that it had no duty to pay for the defense.  The district court ruled that “constructive notice via service of process on the insured’s resident agent, constitute[d] actual notice for purposes of triggering” its obligation to notify insurer and found the insurer to be within its right to deny coverage.  The Court affirmed. 

Analysis:  Defendant argued that its obligation to notify insurer was not triggered until it had actual knowledge of the complaint, which occurred after attempts to collect the default judgment began.  The Court noted that the Maryland General Corporation Law requires each corporation to designate a resident agent to receive service of process and further provides that service of process on the resident agent “constitutes effective service of process … on the corporation.”  Thus, the Court found service on the resident agent to be effective service on defendant, which triggered defendant’s duty to notify insurer “as soon as practicable.”

Defendant argued that it was not effectively served because its CFO was no longer employed when the resident agent forwarded the lawsuit papers to the CFO on June 19, 2008.  The Court stated that internal “corporate screw-ups” do not provide a basis to excuse providing timely notice to its insurer.  Rather, the Court stated that under Maryland agency law “knowledge of an agent acquired within the scope of the agency relationship is imputable to the corporation.”  Accordingly, the Court found that, under Maryland agency law, the defendant had actual knowledge of the lawsuit on the day its resident agent was served with process. 

The Court found the district court properly rejected defendant’s waiver and estoppel arguments. 

The opinion is available in PDF.

Monday, December 5, 2016

Schneider Elec. Bldgs. Critical Sys. v. W. Sur. Co. (Ct. of Special Appeals)

Filed: November 30, 2016
Opinion by: Chief Judge Peter B. Krauser
Holding:  Under Maryland law, a construction surety was not bound by an arbitration clause contained in a subcontractor’s contract with a third party, where, although the contract was incorporated by reference into the bond at issue, the language of the bond did not imply an intent to make the arbitration provision binding on the surety.
Facts:  An electrical contractor (the “Contractor”) engaged a subcontractor (the “Subcontractor”) to perform certain construction work pursuant to a Master Subcontract Agreement (the “Contract”) and a related subcontract (the “Subcontract”).  In accordance with the Subcontract, Subcontractor obtained a performance bond (the “Bond”) from a surety (the “Surety”).  Pursuant to the Bond, the Subcontractor and Surety agreed to be jointly and severally bound to the Contractor for performance of the Subcontract.  The Subcontract was incorporated by reference into the Bond.  In turn, the Subcontract incorporated by reference the Contract, which contained a provision requiring arbitration of disputes between the parties to the Contract (i.e., the Contractor and Subcontractor).
A dispute eventually arose between the Contractor and the Subcontractor, and the Subcontractor ceased performing work under the Subcontract.  The Contractor terminated the Subcontractor, engaged substitute services, and filed a demand for arbitration with the American Arbitration Association, naming the Subcontractor as the sole respondent and seeking damages.  The Contractor later amended the arbitration demand to include the Surety as a named respondent.  In response, the Surety filed an action in the Circuit Court, seeking a stay of arbitration and a declaratory judgment.  The Surety moved for partial summary judgment in the Circuit Court action, asserting that because there was no agreement to arbitrate between the Surety and the Contractor, the Surety was entitled to judgment as a matter of law on its request for a stay of arbitration.  The Circuit Court granted the Surety’s motion, and the Contractor appealed to the Court of Special Appeals.
Analysis:  Maryland adheres to the objective rule of contract interpretation, pursuant to which courts must first “determine from the language of the agreement what a reasonable person in the position of the parties would have meant at the time the agreement was effectuated.”  Hartford Accident and Indem. Co. v. Scarlett Harbor Assocs. Ltd. P’ship, 109 Md. App. 217, 291 (“Scarlett Harbor”), aff’d, 346 Md. 122 (1997); see Nationwide Mut. Ins. Co. v. Regency Furniture, Inc., 183 Md. App. 710, 722 (2009) (“Maryland follows the objective theory of contract interpretation.”).  “Where the contract comprises two or more documents, the documents are to be construed together, harmoniously, so that, to the extent possible, all of the provisions can be given effect.”  Regency Furniture, 183 Md. App. at 722-23 (quoting Rourke v. Amchem Prods., Inc., 384 Md. 329, 354 (2004)).  Further, “a contract should not be interpreted in a manner in which a meaningful part of the agreement is disregarded.”  Scarlett Harbor, 109 Md. App. at 293.
Here, the contract was comprised of three documents—the Bond, the Subcontract, and the Contract.  The Contractor argued that the Surety was bound by the arbitration provision in the Contract because (i) the Bond made the Surety jointly and severally liable with the Subcontractor for “performance” of the Subcontract and Contract; and (ii) the Bond incorporated by reference the Subcontract which incorporated by reference the Contract (and its arbitration provision).
As to the first argument, the Court reviewed the language of the Contract and the Bond to determine the meaning of the term “performance”, and concluded that the term referred “to the performance of the work [the Subcontractor] agreed to complete and not to every contractual provision in the incorporation-by-reference chain.”  As to the second argument, the Court looked to its prior decision in Scarlett Harbor for guidance, which addressed the question of whether a non-signatory surety on a performance bond, which incorporated by reference a construction contract (containing an arbitration clause) between a developer and a subcontractor, could compel the developer to arbitrate its dispute with the surety.  Quoting Scarlett Harbor, the Court held that “‘incorporation of one contract into another contract involving different parties does not automatically transform the incorporated document into an agreement between the parties to the second contract,’ unless there is ‘an indication of a contrary intention’ to do so.”  The Court found no language in the Bond indicating a contrary intent and instead found that the Bond contained a provision expressly requiring disputes to be litigated in Maryland State court.  Accordingly, to give effect to the “express direction that relief must be sought in the courts of this State,” the Court rejected the argument that the Surety was bound by the arbitration provision through incorporation by reference.

The full opinion is available in PDF.


Thursday, December 1, 2016

Yang v. G&C Gulf Inc. (Cir. Ct. Mont. Cnty)

Filed: November 14, 2016

Opinion by: Ronald B. Rubin

Holding:

A putative class of defendant parking lot owners merited certification under Md. Rule 2-231 because it met the necessary requirements under sections (a) and (b) of the rule, given that the parking lot owners executed nearly identical contracts with the Defendant towing company to tow vehicles from their lots without their prior permission and with the discretion to demand up-front payment in exchange for the return of a vehicle, under the same broad grant of authority. Moreover, two named Plaintiffs’ vehicles were towed from the named Defendant lot owner.

Facts:

The original Plaintiff sued the Defendant towing company and its owner alleging that the Defendant towing company (1) engaged in “sweep” or “trespass” towing without obtaining the permission of the lot owner in advance of each tow and (2) improperly asserted a possessory lien on the towed vehicles, essentially holding them for ransom until the vehicle owner paid the towing fees in exchange for the vehicle’s release.

The parties reached a settlement, and the court severed claims against the owner. The court also certified a plaintiffs’ class, consisting of all persons whose vehicles were non-consensually towed by the Defendant towing company from a private parking lot from April 16, 2012, to January 7, 2016, and implicated 24,023 tows.

Plaintiffs then filed a second amended class complaint naming as an additional Defendant an owner of several Montgomery County parking lots who entered into a towing contract with the Defendant towing company and seeking to establish a defendants’ class, consisting of the 500 or more parking lot owners who entered into contracts allowing the Defendant towing company to patrol and “trespass tow” vehicles at will. They claimed that the Defendant towing company towed more than 26,000 vehicles from the lots of those in the putative class. Soon after, Plaintiffs filed another amended class complaint and a motion to add two additional named Plaintiffs who owned cars parking in lots owned by the Defendant lot owner, which was granted.

Analysis:

Certification of a class is governed by Md. Rule 2-231. Proponents must show that a putative class meets the four requirements of section (a) and one of the alternatives under section (b). The Court held, rather summarily, that the putative class met both requirements of sub-section (b)(1), regarding the risk that separate prosecutions would (1) result in inconsistent adjudications with respect to individual members of the class that would establish incompatible standards of conduct for the opponents or (2) result in adjudications of individual members that would be dispositive of the interests of other non-party members, or substantially impair or impede their ability to protect their interests.

The Court also held that the putative class met the requirements of section (a).  The first requirement, that the class is so numerous that joinder of all members is impracticable, was met because at least 573 lot owners entered into standardized, substantially similar written agreements with the Defendant towing company that granted general authority to tow vehicles from their lots. The second requirement, of common questions of law or fact, was met because common questions included: whether the lot owners owed a duty to the Plaintiffs by virtue of the contract; whether the lot owners had a duty to permit the vehicle owners to retake their vehicles without up-front payment; whether a possessory or storage lien and credit card fees were improperly imposed; and the conformity of the towing receipts to applicable laws.

The third requirement, of whether the representative’s claims or defenses are typical of the class, was met because each car was towed from the lot by the Defendant towing company pursuant to a contract with the lot owner. That the contracts are not identical is irrelevant because each contained a grant of authority to “tow at will” without specific, prior authorization of the lot owner. Thus, the claims arise from the same alleged practice or course of conduct by the Defendant towing company, which was expressly authorized by members of the putative class.

The fourth requirement, whether the representative parties will fairly and adequately represent the class interests, was met because the Defendant lot owner rarely specifically authorized a tow, but rather, relied on the Defendant towing company’s discretion and allowed it to require full, up-front payment in exchange for return of a vehicle. The Defendant lot owner's reluctance to represent the class was irrelevant, given his interest and ability in doing so.

The Court then highlighted two special issues with the putative defendant class: the Plaintiffs’ standing to sue and whether the putative defendant class would survive a more rigorous analysis for typicality and commonality, the third and second requirements of section (a), respectively.

The Court examined federal case law interpreting Federal Rule 23 and noted that, generally, a plaintiff representative must possess a claim against each member of the putative class; in other words, every named plaintiff must possess a claim against every putative class defendant in order to be certified.  This is a difficult standard for private parties, and a common regulatory scheme, without more, is typically insufficient.

The Court then cited Master Financial, Inc. v. Crowder, 409 Md. 51 (2009), regarding plaintiffs who obtained home loans from lenders and wanted to sue entities that purchased the loans from the lenders. The Master court posed the question as one of standing or availability of a juridical link, and noted that the purchasers did not purchase the loans of the named plaintiffs, but rather those of unnamed class members. The argument for certification was that by violating the statutory rights of these unnamed members, the purchasers are juridically linked to the named plaintiffs or the other defendants. Ultimately, the Master court did not adopt a juridical link theory.

The Court factually distinguished Master from this case. The Court noted that the plaintiffs in Master, unlike Plaintiffs here, were not yet certified as a class. Moreover, the Plaintiffs, whose cars were towed by the Defendant towing company and two named Plaintiffs’ cars were towed from a lot owned and operated by the Defendant lot owner. The Plaintiffs were certified before the Defendant lot owner was added as a defendant. Unlike the purchasers in Master, the Defendant lot owner in this case is well-representative of his class. He has every incentive to defend against the claims that are legally and factually identical to those of the putative class members, and hinge on the nearly-identical contracts with the Defendant towing company. The members have a right to intervene if they are dissatisfied with the Defendant lot owner’s representation.  

In support, the Court cited a Massachusetts opinion holding that plaintiffs who sued a drug store and the pharmaceutical manufacturers whom the plaintiffs had not dealt with directly were entitled to class certification because, as the contracts between the drug store and the pharmaceuticals were largely identical and the administration of the program contracted-for was substantially similar across the board, there was a sufficient link among the defendants.  

The Court also cited a Missouri case stating that class certification is logically antecedent to questions of standing, and that once a class is properly certified, standing requirements must be assessed with reference to the class as a whole, not merely the named plaintiffs.

The Court concluded that the contracts and common regulatory scheme created a juridical link; the link is consistent with Master; and the Plaintiff class has standing to sue the Defendant class.


This opinion is available by PDF.

Wednesday, November 30, 2016

Boudreaux v. MICROS Systems, Inc. (Ct. of Special Appeals, Unreported)

Filed: August 19, 2016

Opinion by: Judge Wright, Jr.

Holding:  The mere statement of the existence of an offer, which is in excess of an accepted offer in a strategic transaction, is not sufficient to constitute a breach of a fiduciary duty to maximize value when the offer is subject to variability and is in close proximity to the price per share in the accepted offer.

Facts:  Target, a Maryland corporation, discussed a strategic transaction with three companies at various points over several months – Party A, Party B and the acquirer.  Target declined Party A’s proposal, which demonstrated an interest in acquiring target’s common stock for $58.00 per share.  On May 22, 2014, Party B entered into a non-disclosure agreement with target.  After three meetings of target’s board of directors on June 2, 2014, June 4, 2014 and June 5, 2014, target entered into exclusive negotiations with the acquirer.  During the exclusive negotiations, Bloomberg published a news article speculating that target and acquirer were nearing a possible transaction.  The price of target’s common stock rose from $57.71 on June 16, 2014 to $66.33 on June 17, 2014.  Also on June 17, 2014, Party B contacted target noting the Bloomberg article and expressed further interest in a potential transaction.  Party B later submitted a non-binding indication of interest to acquire target in an all-cash transaction at a price range of $67.00 to $70.00 per share, subject to a number of assumptions and contingencies.

Target was acquired by acquirer in a $5.3 billion all-cash tender offer, at a purchase price of $68.00 per share, followed by a short-form merger.  Certain stockholders filed complaints against target and its board of directors alleging the price and the process used to negotiate that price were unfair, breach of fiduciary duties, including value maximization duties, and aiding and abetting such breaches.  The circuit court granted defendant’s motion to dismiss.

Analysis:  When parties assert that the selling price of a company is inadequate, courts require a “showing of lack of diligence, failure to exercise judgment, lack of good faith or the existence of such conflicting interests…as to raise doubts of the ability of the trustee to live up to the duty of loyalty he owes to the beneficiaries.”  Madden v. Mercantile (27 Md. App. 17 (1975)).  Maryland courts have recognized that fair value is a variable sum, dependent on a multitude of factors.  “A price of [the stock] cannot be determined unreasonable ‘unless falsified by something more tangible than the unverified book value of the corporation, especially when those in control, with their intimate knowledge of the present and prospective affairs of the corporation, were willing to part with that control and sell their stock at the price offered.’”

Plaintiffs pled that there was a tentative offer from Party B that, at best, proposed $70.00 per share.  The Court provided:  “[s]tating that an offer of such nature existed is not nearly sufficient to constitute breach of fiduciary duty, especially considering its variability and proximity” to the agreed price per share.  The Court noted that several statements made by the plaintiffs subverted the stated $70.00 per share price and therefore made it speculative.  The Court further noted that plaintiffs could not point to a deal protection device that prevented another company from bidding and stated that, therefore, the target did not favor the acquirer.  The Court dismissed the breach of duties claim. 

The requirements for stating a claim for aiding and abetting a breach of a fiduciary duty are (1) existence of a fiduciary relationship, (2) breach of a duty owed by the fiduciary to the beneficiary and (3) harm resulting from the breach.  Underlying tortious activity must exist for the aider and abettor to be held liable.  Plaintiffs argued that the termination fees and non-solicit provision constituted an aiding and abetting claim “strong enough to withstand a motion to dismiss.”  The Court dismissed the claim because it failed the second prong of the test.

The opinion is available in PDF


This is an unreported opinion.  See Md. Rule 1-104.

Tuesday, November 8, 2016

Rullan v. Goden (U.S.D.C.)

Filed: March 24, 2016

Opinion by: Catherine C. Blake, District Judge


Holdings:  (1) Personal jurisdiction over an out-of-state entity can be shown when a related entity transacts business in Maryland and the out-of-state entity does not maintain separate books and records, accounting procedures and directors’ meetings from the related entity.  

(2) Maryland may be considered an out-of-state entity’s principal place of business if that entity lists a Maryland address on its tax forms and stores business records primarily at its Maryland location.

(3) When the sole shareholders and directors of business entities sign an agreement that addressed the ownership of those entities, the entities are bound by that agreement.

(4) An oral employment contract that lasts for one year is not enforceable under Florida law if it is not reduced to writing and signed by the party against whom it is sought to be enforced.  When a contract contemplates a one-year employment relationship, performance is not deemed complete when a superseding agreement is formed within that one-year period. 

(5) A contract is not void as contrary to public policy unless its illegality is clear and certain.

(6) Under West Virginia law, a contract may be enforceable when the language of an agreement indicates that the parties fully intend to be bound, but they contemplate a more elaborate formalization of the agreement.  The formalization of the agreement is not a condition precedent to the agreement unless the parties expressly indicate as much.

(7) Judicial dissolution may be proper when there is illegal, oppressive or fraudulent action by majority shareholders with respect to minority shareholders.  Under Maryland law, conduct is oppressive when it substantially defeats the reasonable expectations held by minority shareholders in committing their capital to the enterprise. 

(8) Financial accounting is an available remedy when shareholder oppression is present. 

Facts:  Daughter and Father were each 50% owners of Company 1, based in West Virginia, and Company 2, based in Maryland, which owned and managed a West Virginia summer camp (the “Camp”).  As Father contemplated leaving the summer camp business, he and Daughter wanted to add a European partner to help Daughter run the Camp.  Father and Daughter believed that Plaintiff, a Spanish national, could help with the Camp’s revenue by recruiting European children from wealthy families.  Plaintiff had attended the Camp as a camper and a counselor for about 20 years.

On December 7, 2010, Father, Daughter and Plaintiff met in Florida to discuss Plaintiff’s possible involvement with the camp.  They discussed the Camp’s debt, liabilities and size, but Father and Daughter did not correct Plaintiff when he presented inaccurate figures.  According to Plaintiff, the parties agreed that Plaintiff would work for $72,000 annually to recruit European campers, and if this worked out well, Father would sell Plaintiff his 50% share of the Camp.  Daughter could also make Plaintiff her full partner at any time during this first year.  Father, on the other hand, insists that he told Plaintiff that he would need to work successfully with Daughter for one year before he would sell his interest to Plaintiff.  The meeting minutes indicated that Plaintiff would work as an employee for at least one year, after which there would be an evaluation and an opportunity for Plaintiff to obtain shares of the company “if everything goes well.”  However, in the course of working with the Camp, Daughter soon began referring to Plaintiff as her “partner.”  In January 2011, Plaintiff and Daughter formed a new business entity, Company 3, to recruit more campers from Europe.

In January 2011, Father executed a promissory note naming him and Company 2 as jointly responsible for a $350,000 loan that had apparently been made to him in 2009 and which he had not disclosed to Plaintiff.  Plaintiff was also unaware of other issues, such as lawsuits against the Camp, Father and Daughter’s commingling of personal and Camp funds, and the true acreage of the Camp.
   
To secure a visa for Plaintiff to work in the United States, Plaintiff and Daughter were each advised to contribute $55,000 to Company 3.  Plaintiff invested $55,000 of his personal funds in Company 3, but Daughter contributed nothing.  Still, Plaintiff and Daughter each received half Company 3's stock shares.  Daughter also transferred the $55,000 Plaintiff had invested in Company 3 to Company 2, explaining to Plaintiff that the money was being borrowed for Camp expenses.  Daughter told Plaintiff that the $55,000 would be credited toward Plaintiff’s eventual purchase of the Camp from Father.

During the summer of 2011, Plaintiff worked at the Camp.  Father and Daughter were displeased with Plaintiff’s work.  Plaintiff also learned for the first time that two different companies, Company 1 and Company 2 owned the Camp, and that the Camp struggled to pay its bills on time.

Plaintiff, Father and Daughter met in June 2011 to discuss committing the partnership agreement between Plaintiff and Daughter to writing.  Father and Daughter continued to refer to Plaintiff as Daughter’s “full partner in the Camp” and assured Plaintiff that the Camp was doing well financially, though they did not disclose the extent of the Camp’s liabilities or cash-flow related challenges.  In August 2011, Daughter asked Plaintiff to lend $50,000 to the Camp to cover a cash-flow shortage.  Plaintiff did so, thereby depleting his life savings.
 
In late August 2011, the three met again to discuss various issues concerning the partnership.  They drafted and all signed a document called Partnership Stock Agreement (“PSA”) at that time.  Nevertheless, Father subsequently contended that this was a letter of intent contemplating a formal agreement in the future, and that he still needed to evaluate Plaintiff’s involvement, particularly given that the one-year vetting period had not been completed and he was not happy with Plaintiff’s performance during the summer.
   
The August 24, 2011 PSA included several terms.  Plaintiff was to pay $50,000 per year for ten years to purchase 50% stock in Company 1 and Company 2.  $50,000 of the %55,000 that Plaintiff invested in Company 3 was to be credited toward his stock purchase.  The PSA provided other terms, such as agreement as to the manner in which to invest profits and limits on expenditures requiring consent from the other partner.  The PSA's final term stated that “[a]fter this agreement, a due diligence of the company and the additional legal papers required for the transaction will be made.”  No stock certificates or other legal documents were executed at that time, but when Plaintiff encountered other legal troubles, Daughter faxed documentation of Plaintiff’s investment and part ownership in the Camp from the Camp’s Maryland office. 

Plaintiff’s relationship with Father and Daughter deteriorated in late 2011.  Plaintiff learned that the Camp’s appraised value was $2.9 million instead of the $6 million he was led to believe it was worth.  Daughter prevented Plaintiff from having input on the business plan and accessing the financial records.  Plaintiff also learned that Father and Daughter used Camp funds to pay for their personal expenses and commingled funds.  Nevertheless, Daughter asked Plaintiff to contribute more money and bring in more campers.  Meanwhile, Father’s wife had died, allowing him to become more actively involved in the Camp’s affairs both with respect to his time and access to additional capital.  Father expressed disappointment with Plaintiff’s work and inability to assume more of the debt, and eventually banned him from being present or involved in the Camp.  Plaintiff sued Father, Daughter, Company 1, Company 2 and Company 3 (collectively, “Defendants”), alleging breach of contract and other causes of action.  Defendants moved to dismiss, which the court treated as a motion for summary judgment, and Plaintiff filed a cross-motion for summary judgment. 

Analysis:  Company 1, which was organized and ostensibly based in West Virginia, moved to dismiss, arguing lack of personal jurisdiction in Maryland.  Maryland’s Code, Courts and Judicial Proceedings § 6-103(b)(1) provides that a court may exercise jurisdiction over a defendant “who directly or by an agent . . . [t]ransacts any business or performs any character of work or service in the State.”  By showing that Daughter faxed Plaintiff documents indicating his stock ownership from the Maryland office and conducted certain meetings and operations there, Plaintiff made a prima facie showing of personal jurisdiction.  Moreover, although generally the contacts of one entity are not imputed to its affiliate, an exception is found when the affiliates fail to maintain separate books and records, accounting procedures and directors’ meetings.  Because there was significant overlap between the books and records of Company 1 and Company 2, a Maryland company, it was not unreasonable to impute Company 2’s Maryland contacts to Company 1.  Finally, the exercise of jurisdiction was “constitutionally reasonable” because it wasn’t “so gravely difficult and inconvenient as to place the defendant at a severe disadvantage in comparison to his opponent.”  CFA Inst. V. Inst. of Chartered Fin. Analysts of India, 551 F.3d 285, 296 (4th Cir. 2009).  For example, Daughter, a half-owner and officer of Company 1 was a resident of Maryland, and Company 1 had retained the same lawyers as the other defendants.  In fact, because Company 1’s tax forms listed a Maryland address, and the business records were stored in the Maryland office except when Camp was in session during the summer, the evidence supported a finding that Company 1’s principal place of business was in Maryland. 

The court addressed four of the Defendants’ arguments relating to breach of contract.  First, Company 1 and Company 2 argued that they were not bound by the PSA because Father and Daughter signed as individuals, not on behalf of the companies.  Second, Defendants argued that the statute of frauds barred enforcement of the December 2010 employment agreement.  Third, they argued that the employment agreement was illegal or against public policy.  Fourth, they argued that the alleged agreement contained conditions precedent and therefore was not binding.

The court summarily dismissed the first argument by saying that because the subject of the PSA was the ownership of Company 1 and Company 2, and because Father and Daughter were the only two shareholders of both companies, it was clear that Father and Daughter signed on behalf of Company 1 and Company 2.

The court agreed with the second argument concerning the statute of frauds by interpreting Florida law.  The oral employment agreement arose from a meeting of Plaintiff, Father and Daughter in Florida, so Florida’s statute of frauds applied.  Florida law requires that any agreement that cannot be fully performed within one year of creation to be reduced to writing and signed.  The statute of frauds barred enforcement of the December 2010 employment agreement, which completed Plaintiff’s employment for one year beginning in January 2011.  Moreover, the court rejected Plaintiff’s argument that the employment agreement had been fully performed in light of the August 2011 PSA, because Daughter had effectively made him a partner.  Because Plaintiff’s own complaint referred to the oral agreement as “an oral agreement that was to last one year,” the court granted summary judgment for Defendants on the breach of contract claim. 

The court rejected the third argument regarding terms contrary to public policy.  First, the court observed that contracts should not be held unenforceable for public policy grounds unless their illegality is clear and certain.  The court found no merit in Defendants’ argument that it would have been illegal for a partnership to replace a corporation, as Plaintiff could have been both a partner and a shareholder in Company 1 and Company 2.  The court also rejected Defendants’ argument that the contract was unenforceable because a “nonresident alien” may not own stock in an S corporation pursuant to 26 U.S.C. § 1361(b)(1)(C).  A nonresident alien’s purchase of stock in an S corporation is not illegal, but rather it causes the entity to lose its tax status as an S corporation.  Finally, the court rejected Defendants’ argument that the PSA was illegal and unenforceable because Plaintiff’s E-2 visa authorized him to work in the United States for Company 3, not Company 2 or Company 1.  This argument failed because the PSA did not call for Plaintiff to work in the United States, but rather he was to work in Europe recruiting campers, and the agreement did not call for the violation of the terms of his visa. 

As for the conditions precedent argument, the court found that summary judgment was improper on that ground.  Because the PSA was written and signed in West Virginia, the court applied West Virginia law on the existence of a contract.  The court noted that nothing on the face of the PSA indicated that it was a letter of intent and not a contract.  Moreover, even if the PSA were construed as a “preliminary agreement,” it would still be enforceable.  Under West Virginia law, there are two types of binding preliminary agreements, called Type I and Type II.  Type I is a complete agreement in which the parties fully intend to be bound, but they contemplate a more elaborate formalization of the agreement.  See Burbach v. Broad Co. of Delaware v. Elkins Radio Corp., 278 F.3d 401, 407 (4th Cir. 2002).  By contrast, Type II agreements do not fully commit the parties to the ultimate contractual objective, but they commit the parties to negotiate the open terms in good faith within an agreed-upon framework.  See id. at 408.  The court found that the PSA was a Type I preliminary agreement, as its language, “[a]fter this agreement, a due diligence of the company and the additional legal papers required for the transaction will be made,” states that the agreement only needed to be formalized.  Because the parties did not express their intent for the formalization to be a condition precedent, the court would not construe it as such. 

Summary judgment was denied with respect to Plaintiff’s shareholder oppression claims.  The claim against Company 1 arose under West Virginia law, and the claim against Company 2 arose under Maryland law.  Both states’ laws allow for the dissolution of a corporation when the directors or controlling parties act in a manner that is illegal, oppressive or fraudulent.  The court observed that majority shareholders of a corporation have a fiduciary duty to the minority shareholders, which requires the former to exercise good faith and fair dealing toward the latter.  In West Virginia, when a majority shareholder acts to “freeze or squeeze out” a minority shareholder from deriving any benefit of his investment without a legitimate business purpose, oppressive conduct may be found.  In Maryland, oppression is conduct that “substantially defeats the reasonable expectations held by minority shareholders in committing their capital to the particular enterprise.”  Bontempo v. Lare, 119 A.3d 791, 804 (Md. 2015).  The court rejected Defendants’ argument that Plaintiff was not a shareholder of Company 1 or Company 2, because Daughter provided Plaintiff with documentation that he had contributed capital and was a 10% shareholder of both companies.  Summary judgment on this claim was therefore improper. 

The court further observed that both West Virginia and Maryland law provide for accounting as a form of relief against shareholder oppression.  Because there was evidence that Plaintiff was a shareholder of Company 1 and Company 2, summary judgment on the accounting claim was denied. 

The full opinion is available in PDF.





Friday, September 23, 2016

Kunda v. Morse (Ct. of Spec. Appeals)

Filed: August 31, 2016

Opinion By: Reed

Holding: The procedural rule requiring a plaintiff to plead their damages with particularity, having been amended during the course of the litigation, does not require the plaintiff awarded more damages than pled to accept the lesser amount to avoid reversal on appeal.

Facts: The parties had entered into a purchase agreement for a business operated by the Defendant, Kunda, requiring the Plaintiffs to pay a total of $846,950, with a portion bank-financed and the remainder owner-financed.  After entering into the agreement, the parties amended the agreement to alter the payment schedule.  The Plaintiffs paid $200,000 to Kunda, but then failed to timely make certain payments due to Kunda, but not before the period to cure the failure had run.  Kunda, however, re-entered the property and evicted the Plaintiffs, and essentially took back over operations of the store.  The Plaintiffs responded with a lawsuit, alleging breach of contract, and seeking damages in the amount of $102,600.

At trial, the Plaintiffs won a verdict of $200,000, but did not amend their complaint to conform to the verdict.  The defendant did not file a motion to reduce the judgment to the amount of the complaint, but instead appealed the enrolled judgment.

Analysis: The Court first reviewed the contract claims of the parties.  The Court determined that the trial court did not err in finding that Kunda, rather than the Plaintiffs, was in breach of the agreement among the parties, based on the factual findings of the trial court that the Plaintiffs still had time to cure the failure to make timely payments, and therefore Kunda breached by evicting them and taking over the operation of the business.

The Court then had to address the other issue raised by Kunda, namely that the judgment entered in the Plaintiffs' favor exceeded the amount demanded in their Complaint.  The Complaint's damage amount was calculated based on the amount of inventory alleged to have been wrongfully taken by Kunda at the eviction, however, the judgment entered in the Plaintiffs' favor was based on the Plaintiffs' demand that Kunda refund the $200,000 previously paid by the Plaintiffs prior to the breach of the contract.

At the time that the Plaintiffs filed their action, the predecessor rule for pleading damages was in force.  Prior Rule 2-305 provided that a plaintiff was required to demand specific damages, in order to put a defendant on notice of the amount of the claim.  In the event that the amount of damages proven at trial did not correspond to the complaint, a plaintiff was required to amend their complaint promptly after judgment was entered on the docket.  A defendant was also permitted to move to reduce a judgment to the amount in the complaint if a plaintiff failed to properly amend a complaint to conform with a higher award.

However, the Maryland Rules were amended in 2012.  Among the changes was a change to Rule 2-305, which provided that a plaintiff whose damages exceeded $75,000 would simply so indicate, and if less, plead the specific amount for purposes of determining appropriate state trial court jurisdiction.  The issue for the Court was whether the new or prior Rule applied in the present case, as judgment in the case was entered in 2014.  The Court concluded that parties have no vested interest in procedural rules, and that justice was served in applying the current pleading requirement under Rule 2-305.

Therefore, because neither party had made post-judgment motions to adjust the complaint or judgment, the Court affirmed the judgment amount entered by the trial court, reasoning that the amount of damages was in fact supported by evidence adduced at trial, irrespective of the amount of damages specified in the Complaint.

The full opinion is available in PDF.

Tuesday, September 6, 2016

Cunney v. Patrick Communications, LLC (U.S.D.C.)

Filed June 13, 2016

Opinion by James K. Bredar

Holding: Where certain words or terms take on a specific trade usage in a particular industry, it is competent for the parties to a contract in which such words and terms are used to show the peculiar meaning of them in the business or trade to which the contract relates, not for the purpose of modifying the contract but rather for the purpose of elucidating the language of the parties.

Facts:  The Plaintiff was employed at a brokerage firm, which specialized in “broadcast, media, telecom and wireless transactions,” under the provisions of an “Employment Memorandum” that provided Plaintiff would receive a percentage of fee’s the brokerage firm collected as a result of business Plaintiff originated within the broadcast media realm.  Plaintiff’s commissions were to be derived from collected fee’s paid to the firm as a result of his work.  

After the Plaintiff had been employed at the firm for a period of time, one of the principals at the firm (“Principal”) started an investment company with two partners.  This investment company was formed to engage in spectrum arbitrage geared to capitalize on the FCC’s initiative to expand broadband services across the country. Plaintiff supplied the investment company with spectrum valuation reports, viewed as a marketing tool that would lead to engagements of the brokerage firm and corresponding fees to the firm. These reports were used by the investment company in its business operations. Plaintiff provided this information only after he was authorized to do so by Principal.

Principal owned shares in the investment company through an LLC, which was co-owned with his wife (the “LLC”).  Plaintiff received no equity in the investment company.  Plaintiff inquired about getting an equity interest in LLC, a profit share in the investment company and proceeds from an auction sale of the brokerage firm, as opposed to collecting commission in cash from the work he done up until that point. No agreement was finalized.  Later, the Plaintiff brought up the commissions and profit share he felt that he was entitled to during his exit interview.  

Plaintiff sought to recover commissions he allegedly earned through a breach of contract and quantum meruit claim.  Plaintiff also alleged certain violations of the Maryland Wage Payment and Collection Law that are not included in this summary.

Analysis:

To prevail in a breach of contract action the Plaintiff must prove that the Defendant owed the Plaintiff a contractual obligation that was breached.  The language of the contract determines the intent of the parties. Where there are words used in a specific trade or industry, parties may explain the “peculiar meaning” of the words to enable the court to interpret the contract language and the intent of the parties.

The Plaintiff argued that the work he performed while employed at brokerage firm, fit within the confines of what could be considered “a broadcast media transaction” under his Employment Memorandum and therefore entitle him to 40% of the profits the brokerage firm would receive upon liquidation of the investment company. The Court disagreed for three independent reasons.  First, after hearing testimony from expert witnesses who provided definitions for a “broadcast media transaction,” the Court decided that the formation of the investment company did not constitute a broadcast media transaction as that term is understood in the media brokerage industry.

Second, the Court decided that the Plaintiff did not originate the investment company, and that the origination of the investment company was not a transaction that generated fee’s for the brokerage firm. There was no language in the operating agreement of the investment company which referenced services to be provided by the brokerage firm at any point in time. Principal entered into this separate business on his own accord, without the involvement of the brokerage firm. Anything Principal was due to earn from the investment company, was based on its’ future earnings. Through testimony it was said that “there was no agreement that [the brokerage firm] would receive equity interest in commissions for doing work for [the investment company].”

Third, the Court also found the record to contradict Plaintiff’s notion that he was the “originator and procuring cause” of the venture of the investment company.  The Court recognized that he did make contributions to the venture as a going concern but he had no role in the “crucial formative stages of the venture.” A key witness involved in the formation of the investment company testified that he “did not believe he ever spoke with Plaintiff regarding the [investment company] concept before he decided to implement it.” Going on to state that “this transaction would have happened with or without [Plaintiff]”. Another key participant in the formation of the investment company stated that he was not even sure who the Plaintiff was and that he did not use “advice” from the Plaintiff when deciding whether to fund the investment company.  The Plaintiff testified that he “never really saw the actual [investment company] formation documents.”

The Court noted the defense expert witness’s testimony regarding the meaning of “originate” in the media brokerage industry, including that the “originator must identify the potential client and may also be responsible for negotiating the terms of an acceptable representation agreement between the client and the brokerage firm.”  The Court found that Plaintiff provided no such role. 

In the end, the Motion for Summary Judgment submitted by the defense was granted, and judgment for the defendants was entered on two counts of the Plaintiff’s amended complaint. Another count alleged in the Plaintiff’s Amended Complaint was dismissed with prejudice.

The opinion is available in PDF.