Wednesday, July 11, 2018

Young Electrical Contractors v. Dustin Construction (Ct. of Appeals)

Filed:  May 24, 2018

Opinion by:  Judge McDonald

Holding:

Maryland courts interpreting construction contracts under Virginia law will first look to the contract language and then to parol evidence to determine the intent of the parties regarding whether a construction subcontract contains a pay-when-paid or pay-if-paid clause.

Facts:

George Mason University (“Owner”) hired Dustin Construction (“General Contractor”) to renovate the school’s student union building, and General Contractor hired Young Electrical (“Subcontractor”) for the electrical work.

The Subcontract contained a provision “Contractor’s obligation to pay … Subcontractor … is contingent, as a condition precedent, upon Contractor’s receipt of payment from the Owner…” (Section 2(c)).

Subcontractor submitted cost increase requests to General Contractor, which submitted cost increase requests to Owner.  Owner rejected the request; General Contractor never paid the additional cost to Subcontractor.  Subcontractor sued General Contractor for breach of contract.  The Circuit Court for Montgomery County granted General Contractor’s motion for summary judgment.  Subcontractor appealed.

Analysis:

“Contract interpretation is governed by the law of the place of contract or the law chose by the parties.”  Cunningham v. Feinberg, 441 Md. 310, 326 (2015). However, the standard for summary judgment is governed by the law of the forum, in this case Maryland law. Goodwich v. Sinai Hosp. of Baltimore, Inc., 343 Md. 185, 204-207 (1996). Under the Maryland Rules, a circuit court may grant summary judgment only if there is no genuine dispute as to any material fact, and the moving party is entitled to judgment as a matter of law. Maryland Rule 2501(f).

The Virginia Supreme Court has referenced Maryland law in examining the issue in this case.  The Maryland Court of Appeals relied on a 1962 Sixth Circuit case (Thos. J. Dyer Co. v. Bishop Int’l. Engineering Co.) when it examined the issue in Atl. States Const. Co. v. Drummond & Co. (1968) and Fishman Constr. Co. v. Hansen (1965).  In Maryland, Conditional Payment provisions are to be construed as timing provisions (pay-when-paid clauses) unless the contract language clearly indicates that the parties intended the clause to be a condition precedent (pay-if-paid clause). The Special Court of Appeals had affirmed the Circuit Court’s decision.  It held that Section 2(c) contained the “magic phrase” “condition precedent”.

The Court considered whether the General Contractor was entitled to summary judgment for the reason given by the Circuit Court and concluded it was not, then went through an analysis of the reason for summary judgement originally argued by the General Contractor. 

The full opinion is available PDF.

Wednesday, June 13, 2018

Maryland Financial Bank v. Congressional Bank (Cir. Ct. Mont. Cnty)

Filed: May 17, 2018

Opinion by: Judge Anne K. Albright

Holding:  Assignment of key obligations undertaken by a party to a contract containing an anti-assignment provision or other protective provision in favor of the non-assigning party is invalid and unenforceable if such assignment is made without the consent of the non-assigning party. 

Facts:  American Bank (“American”) originated a loan that was secured by a first lien against real property (the “Loan”).  American simultaneously entered into a participation agreement with Maryland Financial Bank (“MFB”) entitling MFB to an undivided 50% interest in everything arising from or out of the Loan and Loan documents.  The participation agreement provided that, among other things, American could not make material changes to the terms of the Loan without MFB’s consent or assign its obligations or duties as servicer of the Loan without MFB’s consent, but American could sell additional participations in the Loan (provided such action would not adversely affect the rights of MFB), control the course of action upon a Loan default after consulting MFB, and service the Loan.  MFB simultaneously sold a majority of its participation interest to National Bank of Cambridge, which later became 1800 Bank (“1800”).

American began to effect a plan of merger with Congressional Bank, during which time American declared a default on the Loan and, with the assistance of Congressional, assigned all of American’s right, title and interest in the Loan to Democracy Capital Corporation (“Democracy”). Congressional continued servicing the Loan after assignment to Democracy.  The assignment was made without MFB’s consent and, among other things, provided Democracy with a consent right before Congressional could take action upon an event of default and gave Democracy the right to terminate Congressional as the servicer.  MFB filed suit against Congressional and Democracy claiming that, by assigning the Loan to Democracy, Congressional had violated the participation agreement; 1800 was joined as a necessary party and all parties countered seeking a declaration as to their respective rights.  As part of a settlement agreement, Congressional transferred its servicing obligations to 1800 with MFB’s consent and over Democracy’s objections, and MFB, 1800 and Congressional dismissed their claims against each other; however, MFB, Democracy and 1880 were still seeking declaratory judgment as to 1880’s and Democracy’s rights and obligations relating to the Loan.  Democracy argued that 1800 did not have standing to seek a declaratory judgment as it was not a party or third-party beneficiary of the assignment between Democracy and American/Congressional.

Analysis:  As an initial matter, the Court held that, because 1800 was a party to the settlement agreement, it had standing to bring an action for declaratory judgment. Applying the “cardinal rule of contract interpretation” to “give effect to the parties’ intentions,” the court further held that the assignment to Democracy of certain of American’s key obligations related to the Loan violated the terms of the participation agreement.  Although the participation agreement gave American the right to sell participation interests in the Loan on terms different from those in participation agreement with MFB, American could not involve other participants in a manner that would adversely affect the rights and obligations of MFB.  After the assignment, not only did Democracy have the same right as MFB to prevent Congressional from assigning the servicing obligations, it could actually terminate Congressional as the servicer; Democracy also had final say as to the course of action upon a Loan default. 

Democracy’s claim that the assignment of the servicing from Congressional to 1800 without Democracy’s failed because the court held that Democracy never had the right to consent to such assignment in the first place as the provisions of the assignment of the Loan to Democracy purporting to give Democracy the right to terminate Congressional as the servicer and withhold consent to any assignment by Congressional of its servicing obligations were invalid.  Therefore, 1800, as the sole servicer of the Loan pursuant to the settlement agreement, was the only party who had the right to foreclose on the real property that had been mortgaged as collateral for the Loan. 

Full text of opinion available here.

Monday, April 2, 2018

Laidlaw v. Beneficial Bancorp, Inc. (Cir. Ct. Balto. Cnty)

Filed:  August 8, 2017
Opinion by: Judge Pamela J. White

Holding: A stockholder can file a derivative claim action against a corporation, without serving a pre-suit demand on a board, if it can shown that a demand would be futile.

Facts: Plaintiff brought suit against company Board of Directors in a derivative suit on behalf of company alleging that the individuals named breached a fiduciary duty owed to the company and were unjustly enriched as a result. After company completed a mutual stock conversion, the Board voted to award themselves more than 1 million shares as a part of a compensation package. The company provided its non-employee directors an average total compensation of $77,521 per non-employee director, while the CEO received $1,712,899 in compensation during the same period. A stock plan was approved by stockholders at the corporations annual meeting. Under the stock plan the Board reserved 3,500,000 shares of company stock. They later awarded themselves 1,043,416 of the reserved stock as a bonus for their role in the mutual-to-stock conversion. The value of the stock due to be disbursed was more than $14 million.

Plaintiff filed suit derivatively on behalf of the company less than a year after the stock plan was approved without making a demand. Defendants filed a Motion to Dismiss.

Analysis:

Plaintiff alleged that the Board breached their fiduciary duty of loyalty to the company by engaging in impermissible self-dealing. He argued that as result the Board was unjustly enriched and disgorgement was warranted. The Defendants argued for a dismissal on the grounds that a pre-suit demand was never submitted on the Board prior to the lawsuit. Plaintiff’s complaint gave inference that the demand would’ve been futile in this case because the board could not have objectively decided on a pre-suit demand due to its’ self-dealing in the stock plan.

“In order to maintain this balance of managerial power, a complaining stockholder generally speaking….must make demand upon the corporate board to commence the action and show that this demand has been refused or ignored before he may file a suit derivatively behalf of the company” Parish v. Md. & Va. Milk Producers Ass’n, 250 Md. 24, 81-82 (1968).  “Failure to serve a pre-suit demand can result in a dismissal of a derivative complaint.” Werbowsky v. Collomb, 363 Md. 581, 620-21(2001).  Here, Plaintiff argued that the demand should be excused because the board was personally and directly conflicted or committed to preserving their self-compensation.

Defendants argued that no member of the board was disqualified because of the fact that a director expected to derive a personal benefit from a corporate transaction. They argued that demand was not futile because the stock award was recommended by the Board’s four-member Compensation Committee and that a bare majority of the nine-member Board  could have fairly considered the Plaintiff’s pre-suit demand.  The Court decided that due to the outsized nature of the award at issue, one could reasonably infer that the Defendants were conflicted to a degree sufficient to excuse demand under Werbowsky.

In its’ analysis of one the counterarguments of the Defendants, the Court went on to state that “the question is whether a majority of the Board has a personal interest in not disturbing the decision that is sufficiently significant to overwhelm their better judgment.” In re Regions Morgan Keegan Securities, Derivative Erisa Litig., 694 F. Supp. 2d 879, 884 (W.D. Tenn. 2010).  Here, each member of the Board has a personal financial interest in the stock award with the stock award being more than four times the salary the President/CEO earned in the year prior to the stock award. The non-employee defendants’ interest in the stock was more than eleven times larger than their compensation from the previous year.

Defendants tried to rely upon the presumption of good faith of the business judgment rule. and that was deemed by the Court to be inapplicable to the circumstances. However since the Board’s actions were not from a disinterested position, they could not enjoy the protection’s of the rule.

The Defendants also argued that because the stockholders ratified the stock award, they were well within their rights to distribute the stock award. Under Md. Code Ann., Corps & Ass’ns § 2-419 (a) & (b)(1)(ii) Maryland law shields transactions between a corporation and its directors against stockholder derivative suits if, after the directors’ interest is disclosed, the “transaction is authorized, approved or ratified by a majority of votes cast by the disinterested stockholders entitled to vote.” The Court stated that the Board abused its power when it adopted the stock award and therefore could not adopt this protection. “The grant of authority for directors to set their compensation, is not a statutory safe harbor for director compensation decisions.” Sample v. Morgan, 914 A. 2d 647, 664 (Del. Ch. 2007). The Court cited that the stock plan did not inform stockholders the Board intended to give themselves a one time stock award of 1 million shares of stock. The Court decided that since stockholders were not properly informed the protection of shareholder approval under § 2-419 would not apply.

The Defendants also failed to provide a defense that would warrant a dismissal of the unjust enrichment claim.

The full opinion is available in PDF.

Friday, March 30, 2018

Meso Scale Diagnostics v. Crescendo Biosciences (Cir. Ct. Mont. Cnty.)

Filed: November 29, 2017

Opinion by: Judge Rubin

Holding:

The post-termination materials requirements contract provision was enforceable despite it being removed during negotiations. In resolving a contract dispute, governed by Delaware law, the court may consider extrinsic evidence of the parties’ intentions.

Facts:

William Hagstrom (“Hagstrom”) formed Defendant in 2007 to commercialize Vectra DA, a test for rheumatoid arthritis.  On March 2, 2009, Defendant accepted Plaintiff’s proposal to evaluate the Vectra DA test’s viability.  The parties began to negotiate for a long-term supply agreement in 2010 after the development phase.  Both parties were invested in their relationship for the long-term, and Defendant knew that Plaintiff wanted to share in the long-term success of Vectra DA. Hagstrom understood that Plaintiff would not move forward with signing the agreement without some means of sharing in the upside potential if the product was commercially successful.

Section 10.1 of the Purchase Agreement contained the post-termination provision.  The Court found Plaintiff’s General Manager’s, Jim Wilbur’s (“Wilbur”), testimony more credible than Hagstrom’s testimony regarding Wilbur explaining Section 10.1 to Hagstrom.  Hagstrom denied Wilbur explained it and further argued that he never intended Defendant to be bound to deal with Plaintiff after the contract’s termination.  During the negotiation process, the provision was removed and re-inserted at least once, but the agreement that Hagstrom signed on April 2, 2012, included Section 10.1. 

On April 21, 2016, Defendant notified Plaintiff that it intended to terminate the agreement effective on April 30, 2018.  Plaintiff sued Defendant on May 23, 2016. (see the opinion for litigation details).

Analysis:

In Delaware, the parties’ subjective expressions are considered when a contract is negotiated between parties on an equal footing and the contract/provision is ambiguous.  SIManagement L.P. v. Wininger, 707 A.2d 37 at 43 (1998).  Extrinsic evidence that is considered “must speak to the intent of all of the parties to the contract.”  Id.  In addition, contracts “should be read to give effect to all its provisions and not to render any part of it ineffective.”  Restatement (Second) of Contracts § 203(a) (1981).

The Court acknowledged that Hagstrom was a “seasoned biotech entrepreneur with more than three decades of executive and board-level experience”, having raised $100 million for Defendant from venture capital firms.  In addition, the contract was reviewed by a global law firm.  The Court found Section 10.1 was a “business compromise” and the materials requirement was a “central element of the bargained for exchange”.

The full opinion is available PDF.

Tuesday, March 27, 2018

Neitzey v. Allen (Cir. Ct. Mont. Cnty)

Filed: August 31, 2017

Opinion by: Judge Michael D. Mason

Holding:  A covenant not to solicit clients that is overbroad on its face will be interpreted based on the wording of the agreement and is not partially enforceable if the employer voluntarily commits to limit its right of enforcement to only those remedies necessary to protect the employer’s legitimate business where such partial enforcement is not achievable based on the wording of the agreement. 

Facts:  A former employee sued his former employer to have certain restrictive covenants stricken from his employment agreement as overbroad.  At issue was a non-solicitation provisions that restricted the former employee from soliciting and accepting business from any customer of the former employer.  The term “customer” was not defined in the employment agreement and was not limited to customers of the former employer during the former employee’s employment by the former employer.  The former employer offered to restrict the meaning of “customer” to those with whom the former employee had personal contact while employed by the former employer. 

Analysis:  The court held that the former employer’s offer to limit enforcement of the non-solicitation provision could not save the provision from being declared unenforceable.  After a lengthy discussion of Holloway v. Faw, Casson & Co., 78 Md. App. 205 (1989) (“Holloway”), Holloway v. Faw, Casson & Co., 319 Md. 324 (1990), and Fowler v. Printers II, Inc., 89 Md. App. 448 (1991), the court agreed with the Court of Appeals in Holloway, that the enforceability of the non-solicitation provision at issue turned on its internal severability.  The non-solicitation provision at issue was not internally severable because, without some measure of damages on a client-by-client basis similar to the liquidated damages clause in Holloway*, there was no way to establish separate damages for clients with whom the former employee had personal contact and the other clients of the former employer.  Therefore, the non-solicitation provision could not be enforced even if the court limited enforcement in the manner proposed by the former employer.

* In Holloway, the non-solicitation provision was accompanied by a liquidated damages provision equal to 100% of the prior year’s fee for any clients solicited in violation of the non-solicitation provision.

Full text of opinion available here.

Monday, March 12, 2018

Comptroller of the Treasury v. Jalali (Ct. of Special Appeals)


Filed: January 31, 2018

Opinion by: Judge James A. Kenney III

Holding: The Court of Special Appeals held that: (1) the question of whether advances of money to a business are considered debt or equity (the “debt-equity” question) is a mixed question of law and fact; (2) in deciding the debt-equity question, the Maryland Tax Court applied correct legal principles and properly evaluated the relevant facts and circumstances when it found that a taxpayer’s advances of money to business entities were advances of debt; and (3) the Court of Special Appeals would not consider an issue not raised by the Comptroller before the Tax Court because, on judicial review of administrative agency decisions, the Court of Special Appeals is restricted to the record before the agency and generally does not consider issues not encompassed in the agency’s final decision (although the Court went on to find that a taxpayer’s advances constituted bad business debt because the record supported a finding that the taxpayer’s dominant motivation for making the advances was to protect his employment).

Facts: Taxpayer made several advances to businesses he owned or in which he had an ownership interest. Each advance was documented by a written promissory note containing a loan amount, loan period, interest rate, and other repayment terms. The interest and repayment terms of the notes were not strictly complied with or enforced. None of the advances were secured. Ultimately, the businesses failed and the advances were not repaid. Taxpayer filed amended tax returns with the Maryland Revenue Administration division and the Internal Revenue Service for the relevant tax year. The amended returns reported the unpaid advances as unreimbursed business expenses and sought a resulting carried-back net operating loss and tax refund. The Comptroller rejected the returns. Taxpayer requested a final determination, and the Comptroller issued a Notice of Final Determination denying the requested refunds, in part, because (i) proof of acceptance of one applicable return by the IRS had not been provided; and (ii) the advances were not bona fide loans. Taxpayer appealed to the Maryland Tax Court, which reversed the Comptroller’s determination and granted the requested refunds. The Comptroller filed a petition for judicial review, and the Circuit Court for Anne Arundel County affirmed the Tax Court. On appeal by the Comptroller, the Court of Special Appeals affirmed the Tax Court’s decision.

Analysis:  The Court of Special Appeals first held (in contrast to Fourth Circuit precedent) that the debt-equity question is a mixed question of fact and law. Therefore, the Court limited its review of the Tax Court decision to determining whether “a reasoning mind reasonably could have reached the factual conclusion that the Tax Court reached”. Applying this standard, the Court found that, in addressing the debt-equity question, the Tax Court properly evaluated the facts of the case in light of many of the factors deemed relevant by applicable case law, including the adequacy of capitalization of the businesses, availability of outside financing, the presence of written promissory notes, the presence of stated loan terms, the unsecured position of the advances, the failure of the businesses to comply with interest and repayment terms, the taxpayer’s subjective intent, and the source of repayments. The Court then addressed the Comptroller’s claim that, even if the advances at issue were debt, the advances were non-business bad debt and therefore not deductible. The Court held that it would not consider the argument because it had not been raised before the Tax Court, noting that “[o]n judicial review of administrative agency decisions, we do not ordinarily ‘pass upon issues presented to us for the first time on judicial review.’” Nevertheless, the Court went on to find that there was sufficient evidence in the record that the taxpayer’s “dominant motivation” in making the advances at issue was to protect his employment, and, as such, the advances constituted deductible bad business debt.

The full opinion is available in PDF.

Monday, March 5, 2018

Jos. A. Bank Clothiers, Inc. v. J.A.B.-Columbia, Inc. (Maryland U.S.D.C.)

Filed: December 15, 2017

Opinion by: Judge Ellen Lipton Hollander

Holding: Where there is ambiguity within a franchise agreement that cannot be resolved by reference to extrinsic evidence, summary judgment may be denied.

Facts: Jos. A. Bank (JAB), a men's retail clothier, first began franchising in the early 1990s and expanded in the late 1990s by opening fourteen franchise stores. In 2005, JAB entered franchise agreements with the franchisees, who agreed to open a franchise store in Columbia, South Carolina.  In October 2008 and April 2010, two more stores were opened in that location. All three stores' initial franchise agreements expired on August 31, 2015. In 2014, JAB was acquired by The Men's Wearhouse, Inc. and maintains it is no longer in the franchising business. 

By the early 200s, the periods of the initial agreements, which provided for ten-year terms, began to expire. JAB renewed those franchises for ten-year periods without requiring the franchisees to negotiate or execute a new franchise agreement, instead merely requiring a notice of renewal and receipt of a franchising fee (this practice being known as "rolling renewals"). There were at least two instances where JAB and the Franchisees discussed whether the renewed agreement would itself allow for further renewals and negotiated different terms.

In February 2015, the Franchisees notified JAB in writing of their desire to renew the franchises for the three stores. In March 2015, JAB informed the Franchisees that they could each purchase a ten-year successor franchise, in an agreement that did not provide for any renewals. The Franchisees claimed they were entitled to franchise agreements that gave them the right to another ten-year renewal after 2015. JAB then rejected the Franchisees' position but extended the deadline to execute the proposed agreements, which the Franchisees declined.

JAB then filed a complaint seeking a declaratory judgment stipulating the franchise agreements at issue provide only a single franchise renewal and not unlimited or perpetual renewals; that the Franchisees' failure to execute the form of successor franchise agreement offered to them by JAB constitutes an election not to buy a successor franchise; and such allows JAB to terminate the franchises at any time. The Franchisees filed counterclaims seeking a declaratory judgment that the Franchisees are entitled to a renewed franchise agreement on the same terms as the original franchise agreement, including the renewal clause; the second counterclaim is for a breach of contract when JAB tendered the successor franchise agreement to the Franchisees.  The Franchisees sought a minimum of $75,000 in damages. JAB filed a motion for summary judgment as to all claims and counterclaims. The Franchisees filed a cross-motion for summary judgment. JAB filed a combined opposition to the Franchisees' motion and reply in support of its own summary judgment motion. The Franchisees replied and requested a hearing.

Analysis: The discussion turned on four issues: (1) whether the Franchisees were entitled to perpetual rolling renewals; (2) whether the agreement unambiguously indicated the proper form; (3) whether the agreement unambiguously allowed JAB to alter the form; and (4) whether extrinsic evidence suggested a genuine dispute as to the parties' intentions.

1) The court determined that an interpretation that requires a business to start multiple new ventures in order to end an old one seemed inherently suspect, holding that it was unambiguously clear that the Franchisees were not entitled to unlimited rolling renewals. Nothing in the plain language of the agreement suggested that the Franchisees were entitled to rolling renewals, nor does the agreement allow the Franchisees to point to any prior practice of granting rolling renewals as an indication that JAB was obligated to offer rolling renewals in this present case.

2) In Calomiris v. Woods, the court held that "a written contract is ambiguous if, when read by a reasonably prudent person, is susceptible [to] more than one meaning." Because the phrases indicating which form of the franchise agreement should be used are susceptible to more than one meaning, the language is unambiguous.

3) The court could not conclude as a matter of law that JAB had the right to materially alter the terms of the new franchise agreement, and the court could not find that the agreement unambiguously supported JAB's actions in offering the Franchisees a successor franchise agreement without a renewal option.

4) A court may look to the extrinsic evidence as to the parties' intent at the time of the agreement's execution, and it is a narrow inquiry. The court only considered evidence of what the parties meant by "then current form," and by "the form of the franchise agreement . . . which Franchisor then customarily uses, or most recently used, in granting franchise rights." Looking at the documentation submitted by the parties, ambiguity could not be definitively resolved by reference to extrinsic evidence.

The court could not conclude that a reasonable jury would have to agree with one or the other, and therefore denied both motions for summary judgment.

The full opinion is available in PDF.

Thursday, February 22, 2018

Jesse Small v. Monty J. Bennett (Cir. Ct. Balto. City)

Filed:  February 5, 2018

Opinion by:  Pamela J. White

Holding:  Demand for attorney's fees and costs incurred prior to the mooting of a shareholder derivative suit (1) failed to satisfy the requirements of the "corporate benefit rule" because the suit was frivolous and causally unrelated to the corporate benefit in question, and (2) failed to meet the requirements for a discretionary award under Maryland Rule 2-703.

Facts:  Defendants are a Texas-based publicly traded real estate investment trust ("Company"), the management group that conducts Company's day-to-day business affairs ("Advisor"), and Company's managing board ("Directors").

Company became a publicly traded corporation in late 2013 and soon entered into an advisory agreement engaging Advisor to perform management functions.  In mid 2015, concerned about a hostile takeover, Directors adopted a poison pill in the form of an amended advisory agreement; one which would impose an onerous termination fee payable by Company to Advisor upon a change in control or termination of the agreement by either side.

Displeasure over the termination fee's size and triggering mechanism was swiftly communicated by a minority shareholder ("Minority") who commenced derivative suits in early 2016.   Minority sued first in Maryland and weeks later in Texas, alleging breach of fiduciary duty for failing to approve candidates for a proxy battle and adopting a termination fee that threatened to reduce the firm's current equity by 50% in the event of a change in control.  Minority was ultimately unable to overcome the business judgment rule presumption and suffered the dismissal of all claims in February 2016.

Though they prevailed in their suit against Minority, Directors were not deaf to the rising noise of discontent.  Between February and April 2016, Directors established a committee to explore negotiation of a termination fee reduction.  Insufficiently placated by the measure, Plaintiff, a separately situated shareholder ("Shareholder") entered the scene and served a demand letter on Directors in April mirroring the claims made by Minority and requesting an investigation and recommendation on the merits of litigation.  

By that time, the record confirmed much of Advisor's and Directors' energies to be centered on the termination fee provision.  Independent directors of Company and Advisor began negotiations and  drafted revisions to the advisory agreement.  An unsolicited takeover offer received Directors' favorable attention and protracted discussions regarding the import and impact of the termination fee.  Directors retained outside counsel to conduct Shareholder's demanded investigation and to report findings at the upcoming December 2016 board meeting.

Directors described these events in several letters to Shareholder between April and October, but Shareholder considered his demand as having been refused.  In October 2016, Shareholder filed a derivative complaint in the Circuit Court for Baltimore City largely regurgitating the content and form of Minority's prior suits: naming the same defendants (Company, Advisor, and Directors) and alleging breach of fiduciary duty with focus on the "unconscionable" fee provision.

Meanwhile, negotiations over the fee provision continued into 2017.  In January, Company's independent directors approved and recommended the amended advisory agreement.  In June 2017 at Company's annual shareholder meeting, shareholders approved the amended advisory agreement which softened its termination fee calculation and trigger mechanism.

That approval served to moot Shareholder's derivative suit; however, arguing that his litigation had led directly to substantial and valuable benefit for Company's shareholders, Shareholder moved for an award in the amount of attorneys' fees and expenses.

Analysis:  The court began by outlining the standard for an award of discretionary fees according to the corporate benefit doctrine, which required Shareholder to demonstrate three elements: (a) that his suit was meritorious when filed, (b) that Directors' action to benefit the corporation was taken prior to judicial resolution, and (c) that the corporate benefit was causally related to the suit.

To the first, the court examined whether Shareholder's suit would have survived the motion to dismiss - and were left wanting.  Shareholder neglected to allege sufficient facts in his complaint to show that Directors had failed to act in accordance with the Business Judgment Rule or made anything other than good faith, informed business decisions.

To the third, the court's examination of the chronology of events led to a finding that neither the termination fee negotiations nor subsequent approval had been causally related to Shareholder's demand letter or threat of litigation.  Instead, the train of activity as to challenging and rectifying the termination fee and trigger mechanisms had already left the station following Minority's suit - and months prior to Shareholder's involvement by demanding an investigation or filing the instant litigation.  Finding insufficient support for the required elements, the court determined Shareholder's litigation to have yielded no corporate benefit.

The court finally turned to Maryland Rule 2-703 which might have permitted a discretionary award in consideration of factors such as (a) time and labor required, (b) novelty and difficulty of questions raised, (c) legal skills required,... (e) customary fees for such services, (f) contingent or fixed fee agreement, (g) time-limiting circumstances,... or (i) experience and ability of counsel, among other factors.  Even had Shareholder been able to meet his burden to show a corporate benefit, his neglect to support the 2-703 showing with sufficient evidence about any of the recited factors and inability to explain or justify the difference between an initial demand for $565,000 and an amended demand for $272,347 were fatal to a request for a discretionary award.

Accordingly, the court denied Shareholder's motion for award of attorneys' fees and expenses.

The full opinion is available in PDF.

Friday, January 12, 2018

Willow Grove Citizens Assoc. v. County Council of Prince George's County, Maryland (Ct. of Special Appeals)

FiledDecember 20, 2017

Opinion byStuart R. Berger

Holding:  A Maryland LLC’s participation in an administrative proceeding by filing for a zoning special exception was valid even though the LLC had forfeited its right to do business in Maryland.  A foreign unregistered corporation's participation in the proceedings as agent or co-applicant did not invalidate the application because the isolated action did not constitute doing business in Maryland.

Facts:  Appellee (“LLC”) in 2001 purchased a parcel in Bowie, Maryland with the intent to construct an assisted living facility.  The parcel being zoned "Rural Residential," prior owner had obtained a special exception for this same purpose but had never developed the land.

In 2012, LLC neglected its State Department of Assessments and Taxation ("SDAT") obligations and forfeited its right to use its name and do business in Maryland.  LLC's sole member was a corporation organized in the District of Columbia not registered to do business in Maryland.  LLC's rights remained forfeited in February 2014 when it applied for a special exception to operate an assisted living facility on the parcel.

The application was accepted, heard, and granted in October 2014 by the local planning commission ("Examiner").  People's Zoning Counsel, appointed by the County Council to protect the public interest and create a full and complete record, was the same attorney who had conducted the settlement and subsequent contract work around the sale of the parcel to LLC.  The record showed no objections made after his disclosure of prior involvement and no objection to his participation in the proceedings.  Examiner's decision was appealed to the County Council who remanded the matter for a determination of LLC's standing with SDAT.

In May 2015, LLC's rights were reinstated, and a month later the sole member became a qualified corporation in Maryland.  LLC provided certificates of good standing at the subsequent rehearing where the Examiner recommended approval.   Appellant, a civic association ("Citizens"), appealed to the County Council, who found LLC legally authorized to file an application for a special exception concerning real or personal property, that forfeiture had not impaired the validity of such a filing, and that the act of applying for a special exception did not constitute doing business.  The Circuit Court for Prince George's County affirmed.

Analysis:  Because Citizens accepted the factual record and objected only to the decision of the County Council on legal grounds, the only question before the court was whether the approval for special exception had been premised on legally erroneous conclusions of law.

Evaluating Citizens' claim that LLC's actions in pursuit of a special exception were a legal nullity, the court pointed to § 4A-911 of the Corporations & Associations Article (emphasis added):
The forfeiture of the right to do business in Maryland and the right to the use of the name of the limited liability company under this title does not impair the validity of a contract or act of the limited liability company entered into or done either before or after the forfeiture, or prevent the limited liability company from defending any action, suit or proceeding in a court of this State.
Irrespective of its forfeiture, LLC remained a legal entity with the power to enter binding contracts at any time.  What of the statute's proscription against bringing lawsuits?  Continuing on, the court found that because LLC had not filed its application "in a court of this State," the implicit prohibition against initiating suits was irrelevant.

"What about the sole member's initial status as an unregistered corporation?," pressed Citizens.  Applying a similar analysis, the court cited § 7-103 of the Corporations & Associations Article to find unregistered corporations to be entitled to engage in many in-state activities such as maintaining, defending, or settling actions, suits, claims, disputes, administrative or arbitration proceedings.  Citizens failed to meet their burden to prove the sufficiency of sole member's contacts or actions within the state to constitute "doing business,"  therefore, the sole member's status as co-applicant or agent in pursuing the special exception was also irrelevant. 

Finally, the court found that Citizens had not preserved for judicial review the question of People's Zoning Counsel's alleged conflict of interest because it failed to raise the issue at any stage of the administrative proceedings.

Accordingly, the court found the County Council's decision to approve the application for special exception to be correct as a matter of law.

The full opinion is available in PDF.

Monday, January 8, 2018

Gary W. Stisser v. SP Bancorp, Inc. (Ct. of Special Appeals)

Filed: November 29, 2017

Opinion by: Andrea M. Leahy

Holding: In a shareholder class action lawsuit for breach of directors’ fiduciary duties following a merger, Maryland did not have personal jurisdiction over directors of the company incorporated in Maryland, nor over the Texas-based merging company because under the jurisdictional analysis it is insufficient that the Texas-based merging company merely incorporated a subsidiary in Maryland to facilitate the merger but conduct no other business activity there, and mere directorship in a Maryland company is insufficient given the absence of factors such as: a director-consent statute, actual business activity in Maryland, and any merger-related activities directed toward Maryland.

Facts: Appellants are shareholders of a company incorporated in Maryland (the “Company”). Appellants filed a shareholder class action lawsuit for breach of fiduciary duties following the merger of the Company into a Maryland subsidiary (the “Maryland Subsidiary”) of a bank holding company incorporated under Texas law with its principal place of business in Texas (the “Holding Company”). The lawsuit named both the Company and its directors (the “Directors”), as well as the Holding Company and its Maryland Subsidiary, as the defendants. 

Appellants are not residents of Maryland. They owned shares in the Company. The Company was incorporated in Maryland, but its headquarters and principal place of business were located in Texas. The Company served as a holding company and parent of a Texas-chartered state bank. The Company did not have any offices in Maryland and did not employ any individuals in Maryland. The Directors did not reside in Maryland, nor were they employed there. The merger negotiations with the Holding Company took place in Texas. 

The Circuit Court for Baltimore City granted motions to dismiss by the defendants, finding in part that the Court lacked personal jurisdiction over the Directors and the Holding Company. The questions on appeal were whether the Holding Company subjected itself to personal jurisdiction in Maryland by forming the Maryland Subsidiary, and whether the Directors were subject to personal jurisdiction because they filed the Articles of Merger in Maryland.  

Analysis: Personal jurisdiction over out-of-state defendants must be established under Maryland’s long-arm statute and comport with the Due Process Clause of the Fourteenth Amendment. Appellants argued that Maryland had general jurisdiction over the Holding Company because it formed the Maryland Subsidiary as an instrumentality or alter ego, and exercised complete control over the Maryland Subsidiary until it was shuttered following the merger. Appellants did not argue the Holding Company was “at home” in Maryland under the traditional  general jurisdiction analysis. 

The Court held that the incorporation of and control over a subsidiary in Maryland is insufficient to establish general jurisdiction over the nonresident parent company, citing in support DaimlerChrysler AG v. Bauman, 134 S. Ct. 746 (2014). In Daimler, Argentine residents sued a U.S. subsidiary of a German parent company whose Argentine-based subsidiary allegedly collaborated in government war crimes. The Supreme Court rejected the establishment of personal jurisdiction over a parent company due merely to its control over a resident subsidiary. Thus, Appellants’ argument fails. 

Moreover, even if the Maryland Subsidiary were an alter ego of the Holding Company, the Holding Company would only be subject to personal jurisdiction upon a showing that it was “at home” in Maryland. Normally, this means the place of incorporation and principal place of business.  

The Court also rejected Appellants’ claim that the Holding Company’s actions of forming the Maryland Subsidiary and consummating the merger in Maryland subjected the Holding Company to specific jurisdiction.  The Court found that the Holding Company did not “transact business,” pursuant to Maryland’s long-arm statute, because the mere filing of the Articles of Incorporation of the Maryland Subsidiary are insufficient.  The Maryland Subsidiary was not intended to do business in Maryland and did not direct activities toward Maryland residents. The Holding Company did not have offices or solicit business in Maryland, nor did it appoint a registered agent there. Moreover, the filing of the Articles of Incorporation is only tangentially related to the underlying claims, and thus insufficient for specific jurisdiction. Additionally, the filing of the Articles of Merger is also insufficient because these were not filed by the Holding Company. 

The Court rejected the argument that by accepting directorship in the Company, the Directors are subject to personal jurisdiction in Maryland. The Maryland legislature never enacted a “director consent” statute which is necessary to provide prospective directors notice sufficient enough to satisfy the Due Process Clause in light of the Supreme Court’s ruling in Shaffer v. Heitner, 433 U.S. 186 (1977). The Court also held that the Pittsburgh Terminal Corp. v. Mid Allegheny Corp., 831 F.2d 522 (4th. Cir. 1987) ruling — which held that a director-consent statute is not always necessary because Shaffer did not require any particular statutory “words of art” — did not apply here because the Pittsburgh Terminal corporation actually did business in the forum state, unlike the Company here. 

The Court also rejected the Appellants’ argument that the Directors are subject to personal jurisdiction because the Directors caused the merger in Maryland and filed the Articles of Merger in Maryland. Appellants did not allege that the Directors directed any contact toward Maryland with respect to the merger. The Directors were non-residents who never entered Maryland in connection with Company business. The filing of the Articles of Merger was the only act that occurred in Maryland. The filing cannot be imputed to the Directors for jurisdictional purposes because the Directors did not file the Articles of Merger personally and did nothing more than participate in the merger decision.

The opinion is available in PDF here.