Monday, June 26, 2017

Capitol PaymentSystems, Inc. v. Salvatore Di Donato (Maryland U.S.D.C)

Filed: May 23, 2017

Opinion by: Ellen L. Hollander

Holding:  Transfer of venue is appropriate if the convenience of the witnesses, convenience of the parties, and interest of justice outweigh the plaintiff’s choice of venue.

Facts:  Plaintiff is a Maryland corporation with the principle place of business in Maryland that operated payment transaction processing services to a wide array of businesses. Defendant is a New Jersey company with a principle place of business in New Jersey, that operated as an agent in the electronic payment processing industry. Plaintiff and Defendant entered into a contractual agreement in which the defendant would provide independent marketing services.

Plaintiff alleged that Defendant entered into outside business agreements with third parties in breach of the agreement. Plaintiff and Defendant attempted to renegotiate the terms of the agreement, but failed to reach an understanding.

Plaintiff filed suit seeking injunctive relief in the Anne Arundel County Circuit Court on February 1, 2016. Defendant filed a counter suit in the United States District Court for the District of New Jersey on February 25, 2016 before being served for the Maryland case. After withdrawing the case for an injunction from the Circuit Court, the Plaintiff removed the case to the United States District Court of Maryland on March 23, 2016 and the Defendant moved to transfer venue to New Jersey.

Defendant argued that New Jersey was a more convenient forum because it is where the dispute arose, the potential witnesses reside, and the majority of the evidence is located. Plaintiff contended Maryland is the appropriate venue since it is a Maryland corporation, the agreement is governed by Maryland law, the signed agreement was returned to Maryland, and the first-to-file rule requires adjudication of the case in Maryland.

Analysis:  The Court began its analysis by upholding the validity of both the Maryland suit as well as the New Jersey action. In adjudicating a motion to transfer the Court examines several case-specific factors. The factors pertinent to this case include: 1) the weight accorded to the plaintiff’s choice of venue; 2) witness convenience and access; 3) convenience of the parties; and 4) the interest of justice. (Citing Plumbers and Pipefitters Nat. Pension Fund v. Plumbing Serv., Inc.)

The Court began its analysis by reviewing the Plaintiff’s choice of venue. Since the conduct underlying the claim occurred entirely in New Jersey the Plaintiffs’ choice of venue is diminished. The Court sided with the Defendant that the convenience of the witnesses favored New Jersey because all the third parties citied in the complaint, which the merchant Defendant allegedly interfered with, are located in New Jersey or New York. The convenience of the parties would not be more burdensome in New Jersey or Maryland, so the Court did not weight this factor heavily in the final determination. Likewise, transfer would not negatively impact the interest of justice since New Jersey Courts have ample history of ruling on cases controlled by Maryland law.

Finally, the Court declined to adhere to the first-to-file rule since the convenience of the factors supported transfer to New Jersey. Examining this rule under the interests of justice, the fact that the Plaintiff filed first in Maryland Court did not control because of the specifics of the matter. Defendants filed in Federal Court before the Plaintiff, weeks before being served notice of the Maryland case and the Maryland case was moved to Federal Court.

Motion to transfer Granted.

The full opinion is available in PDF.

Wednesday, June 21, 2017

Amster v. Baker (Ct. of Appeals)

Filed: May 22, 2017

Opinion by: J. Adkins

Holding:  Commercial information is “confidential” and therefore exempt from disclosure under the Maryland Public Information Act (the “MPIA”) if it “would customarily not be released to the public by the person from whom it was obtained.”

Facts:  A developer submitted a zoning application to the Prince George’s Planning Board of Maryland-National Capital Park and Planning Commission (the “Commission”) to develop a certain tract of land for a mixed-use town center.  In connection with the planned development, the developer entered into a lease with a supermarket chain.  The developer voluntarily provided a redacted copy of the lease with the supermarket to the Prince George’s County Executive (the “County Executive”) to assist with ongoing discussions regarding the proposed development.  The plaintiff filed a MPIA request with the County Executive requesting a copy of the lease.  Such request was denied and plaintiff filed suit against the County Executive seeking access to the lease (the developer subsequently intervened as a defendant).  Applying the test established in Critical Mass Energy Project v. Nuclear Regulatory Commission (975 F.2d 871 (D.C. Cir. 1992)), and based in part on an affidavit from an employee of the developer that the contents of the lease were the product of “extensive confidential negotiations,” the circuit court granted the defendants’ motion for summary judgment finding the lease was “confidential commercial information.” On appeal, the Court of Special Appeals affirmed the circuit court’s grant of summary judgment and further held that confidential treatment of the lease had not been waived by the public disclosure of certain terms of the lease.

Analysis:  The MPIA grants a general right of access to records in the possession of the Maryland State and local governments, which is limited by numerous exemptions to the disclosure requirement.  A mandatory exemption to the disclosure requirement applies to any part of a public record containing any confidential commercial information.  Looking to federal courts’ interpretations of a similar exemption under the Federal Freedom of Information Act (the “FOIA”), the Court of Appeals declined to apply the two-part test established in National Parks and Conservation Ass’n v. Morton (498 F.2d 765 (D.C. Cir. 1974)) and instead upheld the circuit court’s application of the test established in Critical Mass, which held that commercial information voluntarily provided to the government is confidential, and therefore not required to be disclosed under the MPIA, if it “would customarily not be released to the public by the person from whom it was obtained.”  The Court of Appeals noted that in National Parks, the commercial information was provided to the government pursuant to statute, whereas in Critical Mass, and in this case, the commercial information was provided to the government voluntarily; therefore, the government interests at stake differed.  In the former situations, the government’s interest focuses on the effect of disclosure on its quality; in the later situations, the government’s interest is in ensuring continued available of the voluntarily disclosed commercial information, since the disclosing party may refuse further cooperation.  

Although the circuit court applied the correct test in granting summary judgment in favor of the defendants, the Court of Appeals vacated the summary judgment and remanded the matter back to the circuit court to conduct the necessary factual inquiry to determine whether all aspects of the lease were confidential and therefore exempt from disclosure under the MPIA.  The Court of Appeals highlighted that the disclosure requirements and exemptions under the MPIA apply to information, not documents, and therefore the circuit court needed to determine whether the lease contained any non-confidential information subject to disclosure, particularly because the defendants failed to demonstrate that the lease should be exempt from disclosure in its entirety because the developer had not demonstrated that it would not customarily disclose any contents of the lease.  Moreover, any information with respect to the lease that was already publically disclosed by defendants in other settings was not protected by the exemption for confidential commercial information.

The full opinion is available in pdf.

Sunday, June 11, 2017

Proexpress Distributors LLC v. Grand Electronics (Ct. of Special Appeals, Unreported)

Filed: May 24, 2017

Opinion by: Judge Glenn T. Harrell, Jr.

Holding:

Simply storing a “trade secret” in a cloud-based service is not sufficient to be considered reasonable to maintain its secrecy under Maryland law.  Reasonable efforts may include changing the password to the account after an employee leaves, limiting access on a “need to know” basis within the company, or restricting the dissemination of information with confidentiality or non-disclosure agreements.

Facts:

Plaintiff sells electronic products on Amazon.com.  Defendant is a competitor and was founded by a former employee of Plaintiff.  Plaintiff alleges it owns a trade secret in its “methodology by which it inputs information into the Amazon search template in order to drive sales for its online tablet computer business.”  Plaintiff keeps its trade secret, along with other business documents, in cloud-based password-protected accounts on the Internet.  Plaintiff shares access to the Dropbox accounts with its service providers.

On September 18, 2014, Plaintiff filed a complaint in the Circuit Court for Montgomery County for misappropriation of a trade secret.  Plaintiff asserted that a consultant of Defendant, who was a former employee of a service provider of Plaintiff, viewed the trade secret in Plaintiff’s Dropbox account in April 2014.

The Circuit Court ruled in favor of Defendant on the trade secret issue.  Plaintiff appealed to the Court of Special Appeals (Court), which affirmed the decision regarding the alleged trade secret.

Analysis:

Md. Code, Commercial Law Art. § 11-1201 states that a “trade secret” is “information… that (1) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

The Court upheld the Circuit’s Court decision in ruling that Plaintiff’s actions were not reasonable to safeguard its proprietary information involving a cloud storage service.  Cloud storage is a “backup and storage service on the Internet” whereby a “customer’s files are downloaded to anyone’s computer with a Web browser and password.”  Dropbox’s desktop applications allow customers to “easily move files from (their) computer to the cloud and vice versa by dragging and dropping them into (their) Dropbox folder.  The service automatically and quickly syncs (their) files across all of (their) devices, so (they) can access everything, everywhere.”

The Court contrasted Plaintiff’s efforts with the company in LeJeune v.Coin Acceptors, Inc., 381 Md. 288, 310-11, 849 A.2d 451, 464-65 (2004), which did not want its customers disclosing its pricing with other customers because it used a “tiered pricing scheme”.  The company acted reasonably under those circumstances by (1) negotiating non-disclosure agreements with its customers, (2) marking “confidential” on pricing and proposal documents, and (3) communicating to the employees in the company’s employee handbook that it required employees to protect the company’s secret manufacturing process and business methods.

The Court determined that merely uploading its proprietary methodology to a cloud-based program on the Internet is not a reasonable effort to protect the information.  The Court suggested ways in which a company can satisfy the second prong of § 11-1201 when information is stored in the “cloud”.  Examples of reasonable efforts to maintain the secrecy of Plaintiff’s methodology include (1) changing the password to the account after an employee leaves, (2) limiting access on a “need to know” basis within the company, and (3) restricting the dissemination of information with confidentiality or non-disclosure agreements.

The Court also reviewed whether the punitive damages award was excessive.

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

The full opinion is available PDF.

Wednesday, June 7, 2017

James Dillon v. BMO Harris Bank, N.A. (4th Circuit)

Filed: May 10, 2017

Opinion by: Judge Barbara Milano Keenan

Holding: An arbitration agreement containing choice-of-law provisions applying tribal law and disclaiming the application of federal and state law was held to be unenforceable because (1) by its unambiguous language, it triggered the prospective waiver doctrine, which disallows arbitration agreements that prevent litigants from vindicating federal substantive statutory rights as contravening public policy; and (2) the provisions could not be severed as they went to the essence of the agreement and were negotiated by a party, not in good faith, with superior bargaining power.

Facts:  Plaintiff, a resident of North Carolina, applied for and received a “payday loan” in 2012. “Payday loans” are short, unsecured consumer loans for small amounts and with generally high interest rates (sometimes in excess of 400%). The loan was offered through the website of Great Plains Lending, LLC (the “Company”), which was wholly owned by a federal tribe.  Plaintiff executed a contract (the “Contract”) that contained a loan agreement and an agreement to submit disputes to arbitration. Both agreements contained choice-of-law provisions that required the application of tribal law and disclaimed the application of state or federal law.

Plaintiff filed a putative class action lawsuit in district court, claiming that the Company and other tribal lenders had issued unlawful loans. Instead of suing the lenders for violating state usury laws, Plaintiff sued the financial institutions that facilitated the electronic lending transactions. Plaintiff claimed that the institutions constituted an enterprise whose members, including Defendant BMO Harris (“Defendant”), conducted and participated in the collection of unlawful acts in violation of the Rackeeter Influenced and Corrupt Organizations Act.

In district court, Defendant sought to compel arbitration pursuant to the terms of the Contract and relying on the Federal Arbitration Act (“FAA”). The district court held the Contract unenforceable because it denied the applicability of all federal and state law. Defendant appealed.

Analysis: Pursuant to the FAA, the Court has jurisdiction to review de novo the order denying the motion to compel arbitration. The FAA provides that arbitration agreements are valid and enforceable, except upon grounds at law or in equity for the revocation of any contract. Consistent with such contract principles, the Supreme Court has held that arbitration agreements that operated as prospective waivers of a party’s right to pursue statutory remedies are unenforceable as violating public policy. This prospective waiver doctrine keeps courts from enforcing arbitration agreements that prevent a litigant from vindicating federal substantive statutory rights. 

A mere foreign choice-of-law provision is insufficient to trigger the application of the doctrine. A court must first analyze whether, as a matter of law, “the choice-of-forum and choice-of-law clauses operate in tandem as a prospective waiver of a party’s right to pursue statutory remedies.” Where it is unclear, the arbitrator should decide in the first instance whether a litigant is deprived of those remedies, and the waiver issue is not ripe until a federal court is asked to enforce the arbitrator’s decision. 

In Hayes v. Delbert Services Corp., 811 F.3d 666 (4th Cir. 2015), the Court applied the prospective waiver doctrine to a contract governing an internet payday loan by another federal tribe lender. The choice-of-law provision disclaimed the application of any law other than that of the tribe. The Hayes Court held that this language flatly and categorically renounced the authority of federal statutes. The provision was not severable from the contract because it went to its essence; the animating purpose of the agreement was to circumvent federal law. Another disclaimer of the application of federal and state law in the contract lent support to this position.

Here, Defendant argued that the waiver issue was not ripe as it had not yet come before an arbitrator. Plaintiff countered that the issue was ripe because the language of the choice-of-law provision was unambiguous, thus triggering the prospective waiver doctrine. The Court agreed with Plaintiff. The choice-of-law and other provisions in the Contract are similar or identical to the provisions in Hayes; these applied the law of the federal tribe or disclaimed the application of federal and state laws as to the Contract and lender. As in Hayes, the Contract was an unambiguous attempt to apply tribal law to the exclusion of federal and state law.

The Court held that the choice-of-law provisions could not be severed from the Contract. Severance is allowed only if the provision is not essential to the agreement and the party seeking to enforce the remainder of the agreement negotiated it in good faith. Restatement Second of Contracts § 184 (1981). Here, as in Hayes, the provision went to the essence of the agreement. The Court did not accept Defendant’s request to grant Plaintiff access to federal substantive rights because this would essentially allow Defendant to rewrite the Contract and defeat the purpose of the Contract entirely.

Additionally, the Company used its superior bargaining power to avoid the application of state and federal law, and Section 184 does not permit redrafting where superior bargaining power is used to extract a promise offensive to public policy. Thus, the Company did not meet the second prong to negotiate in good faith.  

The full opinion is available in PDF. 

Friday, June 2, 2017

Egan v. First Opportunity Fund Inc. (Cir. Ct. Balto. City)

Filed: April 22, 2016

Opinion by: Judge W. Michel Pierson

Holding: Stockholders of a Maryland corporation were not entitled to payment of fair value for their shares of stock (commonly referred to as “appraisal” rights) under the Maryland General Corporation Law (the “MGCL”), § 3-202, where the corporation’s charter was amended to expressly divest the stockholders of any appraisal rights in connection with a subsequent consolidation of the fund into another fund because (i) appraisal rights are not “contract rights” nor were they “expressly set forth” in the corporation’s charter as required under MGCL § 3-202(a)(4), and (ii) the amendment of the charter to divest the stockholder appraisal rights occurred prior to the consolidation and thus, at the time of the vote on the consolidation, the charter had eliminated appraisal rights in accordance with MGCL § 3-202(c)(4).

Facts: First Opportunity Fund, Inc., was a registered closed-end investment fund formed as a Maryland corporation (“FOFI”).  In 2014, the stockholders of FOFI and the stockholders of two other funds managed by affiliated directors and fund advisors were asked to approve a plan of reorganization (the “Consolidation”), under which the assets of those three funds would be transferred to Boulder Growth and Income Fund, Inc. (“BIF”).  Of all the funds involved in the Consolidation, FOFI was the only corporation whose stockholders enjoyed Maryland’s statutory appraisal rights under MGCL § 3-202 (because the other funds were publicly traded and thus excepted from the appraisal rights requirement pursuant to MGCL § 3-202(c)(1)).  Therefore, prior to submitting the proposed Consolidation to the stockholders for their consideration, the board of directors of FOFI proposed that the charter of FOFI be amended to divest FOFI’s stockholders of any appraisal rights (“Proposal 1”).

The proxy statement issued by the directors of the four funds disclosed that if Proposal 1 was approved, the stockholders meeting would be temporarily adjourned and FOFI would file articles of amendment to amend the charter to include Proposal 1.  If Proposal 1 was not approved, the proposal to consider the Consolidation would not be considered.

At the FOFI stockholders meeting, Proposal 1 was approved.  The meeting then adjourned and articles of amendment containing Proposal 1 were accepted for record by the State Department of Assessments and Taxation.  The meeting then resumed and the transfer of assets from FOFI to BIF was approved by the FOFI stockholders.  Following these actions, two of FOFI’s stockholders (the “Plaintiffs”) submitted a written demand for the fair value of their shares and otherwise complied with the statutory requirements for perfecting appraisal rights under the MGCL.  FOFI and BIF denied the demand and the Plaintiffs filed suit, seeking fair value of their stock pursuant to MGCL § 3-202.  The defendants moved to dismiss the action, and, for the reasons detailed below, the Court granted the defendants’ motion and dismissed the Plaintiffs’ claims.

Analysis: MGCL § 3-202 provides that stockholders of a Maryland corporation may demand and receive payment of fair value of their stock in the event of certain fundamental corporate changes.  The statute also provides a number of circumstances where a dissenting stockholder has no such appraisal right.  See MGCL § 3-202(c).  In Egan, the Plaintiffs alleged that two fundamental changes occurred in connection with the Consolidation process, thus triggering their appraisal rights under the MGCL.  First, in Count I of the Plaintiffs’ complaint, based on the Consolidation of FOFI into BIF, the Plaintiffs asserted appraisal rights arising under MGCL § 3-202(a)(1), which provides for appraisal rights in the event a “corporation consolidates or merges with another corporation.”  Second, in Count II of their complaint, the Plaintiffs asserted appraisal rights arising under MGCL § 3-202(a)(4), which provides for appraisal rights if a “corporation amends its charter in a way which alters the contract rights, as expressly set forth in the charter, of any outstanding stock and substantially adversely affects the stockholder's rights, unless the right to do so is reserved by the charter of the corporation.” 

As to Count I, the Court found that, although there was “no dispute” that the Consolidation of FOFI into BIF was a consolidation or merger under MGCL § 3-202(a)(1), the Plaintiffs’ claims were subject to the provisos of MGCL § 3-202(c).  Among other things, that subsection provides that “a stockholder may not demand the fair value of the stockholder’s stock and is bound by the terms of the transaction if: … [t]he charter provides that the holders of the stock are not entitled to exercise the rights of an objecting stockholder under this subtitle.”  MGCL § 3-202(c)(4).  The Court found that the amendment to FOFI’s charter was adopted in accordance with the literal requirements of the MGCL and, consequently, pursuant to MGCL § 3-202(c)(4), the Plaintiffs had no appraisal rights by virtue of the Consolidation.  In reaching this conclusion, the Court rejected the Plaintiffs’ arguments that the adoption of Proposal 1 and the consolidation were really one and the same transaction and that the amendment of FOFI’s charter should therefore be ignored for purposes of determining the Plaintiffs’ appraisal rights.  Rather, the Court held that the independent nature of the adoption of Proposal 1 and the approval of the Consolidation could not be ignored by the Court in search of a higher equity under the guise of a substance over form analysis.

As to Count II, the Court found that the Plaintiffs had no appraisal rights as a result of the amendment of FOFI’s charter because, after reviewing the legislative history of MGCL § 3-202(a)(4), the Court concluded that appraisal rights are not “contract rights” as used in the statute but that the statute instead refers to “contractual attributes of the stock itself, and does not mean every contract right included in the corporate charter.”  The Court also found that, even if appraisal rights were contract rights, FOFI’s charter made no mention of such rights and thus they were not “expressly set forth” in FOFI’s charter prior as required under MGCL § 3-202(a)(4).  In reaching this conclusion, the Court rejected the Plaintiffs’ assertion that appraisal rights should be deemed to be expressly set forth in FOFI’s charter because a corporation’s charter is a contract between the corporation and its shareholders and statutory law is incorporated into a contract under Maryland law.  On this issue, the Court concluded that “treating an object ‘as though’ it is expressly set forth is not equivalent to that object actually being expressly set forth.”

The full opinion is available in PDF.

Thursday, May 25, 2017

Dexter v. ZAIS Financial Corp. (Cir. Ct. Balto. City)

Filed: December 8, 2016

Opinion by: Judge Audrey J.S. Carrion

Holding:

The Wittman standard of awarding attorneys’ fees is not met in a cash-stock merger suit alleging inadequate information in the registration statement because (1) directors do not owe shareholders a common law duty of candor in that type of transaction, and therefore the claim cannot be “meritorious” when filed, and (2) the corporate benefit was not casually related to the suit when the information in published disclosures was in accordance with previous public filings filed before the suit.

Facts:

On April 7, 2016, a merger agreement was announced between ZAIS, the Defendant, and another party, the Second Defendant, in which shareholders could elect to receive all cash or all stock.  The Second Defendant would be merged into a subsidiary of Defendant, ZAIS would issue its shares to the Second Defendant’s shareholders, and ZAIS would make a pre-merger tender offer to its shareholders who would not like to own shares in the resulting company.

The registration statement was filed on May 10 and amended on June 20 and August 5, 19 and 26, 2016 (the “August Registration Statement”).   On August 24, 2016, Dexter, the Plaintiff, an individual shareholder of Defendant, filed a complaint alleging inadequate information about the shareholder vote.  Plaintiff argued that details about the final exchange ratio, the per share tender offer price and conflicts of interest were missing from the registration statement.

Dexter then filed a Motion for Preliminary Injunction.  On September 12, 2016, ZAIS filed supplemental disclosures with the SEC.  On September 19, 2016, Dexter withdrew the Injunction Motion as moot and it was granted.  On September 30, 2016, Dexter filed a request for attorneys’ fees.  Defendants argue that the supplemental disclosures were disclosed not due to Plaintiff’s demand letter, but rather in accordance with the registration statement.

Analysis:

The “corporate benefit” doctrine is an exception to the American Rule, which states that litigants bear the cost of their own attorneys’ fees and expenses.  In re First Interstate Bancorp, 756 A.2d 357, 756 A.2d 353, 357 (Del. Ch. 1999).  It should be noted that attorneys’ fees can be awarded even when a defendant moots a claim by satisfying a plaintiff’s demands.  Tandycrafts v. Initio Partners, 562 A.2d 1162, 1164 (Del. 1966) citing Chrysler Corp. v. Dann, 223 A.2 384, 386 (Del. 1966).

The Court required the Plaintiff to satisfy the three conditions of the Wittman standard: the suit was meritorious when filed; the action producing the corporate benefit was taken by the Defendant prior to a judicial resolution; and the resulting corporate benefit was causally related to the lawsuit.  Wittman v. Crooke, 120 Md. app. 369, 379, 707 A.2d 422, 426 (1998).

1. The Suit was not meritorious when filed.

A suit is “meritorious” when it can “withstand a motion to dismiss on the pleadings.”  The Court held that Plaintiff’s claim that the Defendant’s directors breached the duty of candor and the Second Defendants aided and abetted that breach could not have been meritorious.

The Court disagreed with Plaintiff that Shenker applied to this case.  The transaction in Shenker v. Laureate Education, Inc., 411 Md. 317, 338, 983 A.2d 408, 420 (2009), involved a cash-out merger after the decision to sell the corporation had already been made and that Court “determined the common law duties are triggered when the decision is made to sell the corporation, the sale of the corporation is a foregone conclusion, or the sale involved an inevitable or highly likely change-of-control situation.”

In this case, the Court agreed with Defendant that Revlon duties do not apply in a cash-stock election merger, similar to this merger.  Therefore, individual shareholders like the Plaintiff may not bring direct claims against the directors for a breach of common law duties.  ZAIS also referred to Sutton v. FedFirst Financial Corp., 226 Md. App. 46, 85, 126 A.3d 765, 788 (2015), which involved a stock-for-stock transaction, and the Court of Special Appeals did not apply Revlon.

2. The corporate benefit was not causally related to the Suit.

The September 12 Supplemental Disclosures were made in accordance with the August Registration Statement, which included a prospectus with a calculation of the exchange ratio, that was to be publicly announced at least five days before the shareholder meetings.

The Court found that the benefit to the Defendant’s shareholders – the disclosure of the Exchange Ratio and Tender Offer price – was not caused by the Plaintiff’s lawsuit; it was “mere happenstance” (Wittman).

The full opinion is available in PDF.

Wednesday, May 24, 2017

Murray v. Midland Funding, LLC (Ct. Spec. Appeals)

Filed: April 26, 2017

Opinion By: Friedman

Holding: The applicable statute of limitations limits the timeliness of legal claims, and the doctrine of laches limits the timeliness of equitable claims, but either or both sets of principles may limit the timeliness of declaratory relief from a court.

Facts: The Plaintiff had been sued by the Defendant on a debt, resulting in a judgment in favor of the Defendant.  Subsequently, in 2010, the Maryland State Collection Agency Licensing Board held that companies like Defendant are debt collectors and must be licensed to operate in Maryland.  The Court of Appeals held in Finch v. LVNV Funding, 212 Md. App. 748 (2013), that judgments obtained by such unlicensed debt collectors are void.  The Plaintiff brought a purported class action on behalf of herself and other debtors seeking various relief against Defendant for judgments obtained by the Defendant while it was unlicensed.

Analysis: The Court discussed the rules that bar stale claims.  For legal claims, the time limitations are determined by the applicable statute of limitations.  Under Maryland law, Courts & Judicial Proceedings Article § 5-101 may apply the three year limitation period for monetary claims against debt collectors that attempt to enforce void judgments against a debtor.  However, the Court held that this was not a bar to Plaintiff's equitable claims advanced and dismissed by the trial court.

For equitable relief, such as injunctive relief, the doctrine of laches determines whether a plaintiff's claim is time barred.  "There is no firm time limit for laches: rather a judge sitting in equity considers plaintiff's delay in asserting the claim and its causes and weighs that against the prejudice to the defendant caused by the late assertion of the equitable claim."  As to the Plaintiff's count for injunctive relief against the Defendant, the Court held that the trial court's dismissal of this count had to be reversed, and the above laches doctrine would need to be applied to her demand.

However, declaratory judgments sit in a hybrid category when analyzing whether such a claim is time-barred.  The Court notes that when a plaintiff merely seeks a court declaration that a judgment obtained by an unlicensed debt collector is void, there is no time limit on when such an action may be filed.  But, when the declaratory judgment count includes other relief, the applicable time limit on each of those claims must be calculated based on whether the relief is legal or equitable in nature.  As a result, the Court reversed the trial court's dismissal of her declaratory judgment claim so that the trial court could determine what relief, if any, was sought by the Plaintiff ancillary to a declaration that Defendant's judgment was void.

The full opinion is available in PDF.

Tuesday, May 23, 2017

Frank R. Nerenhausen v. Washco Management Corp. (U.S.D.C.)


Filed: April 18, 2017

Opinion by: James K. Bredar, United States District Judge
  
Holding:

            The United States District Court for the District of Maryland granted landlord Defendants, Washco Management Corp., summary judgment when tenant Plaintiffs attempted to collect damages for an injury occurring in the leased premises after Plaintiff entered into a lease agreement waiving Plaintiff’s rights to all legal claims resulting from Defendants’ negligence.

Facts:

            In April of 2013, Plaintiffs moved into a furnished townhouse, owned and managed by Defendants. On September 4, 2013, Plaintiffs signed a lease with Defendants, which was in force at the time of the critical events of this case. That lease contained an exculpatory clause purporting to disclaim Defendants’ liability for “any damage, loss, or injury to persons occurring in, on, or about the apartment or the Premises.”
           
            In compliance with the terms of the parties’ agreement, Plaintiffs’ townhouse was fully furnished. The furnishings included a coffee table with a metal frame and a top constructed from non-tempered glass. The table was located in the townhouse’s first floor family room.
           
            On January 4, 2014, as Plaintiff Frank Nerenhausen sat on the edge of the coffee table to tie his shoe, the glass top shattered. Broken glass punctured Mr. Nerenhausen’s right buttock, lacerating his pudendal artery and resulting in nerve damage.

Analysis:

(1)  Validity of the Exculpatory Clause under Maryland law

Relying on relevant case law and long-standing Maryland statute, the Court finds the well-established freedom to contract validates this lease agreement’s exculpatory clause.

The Court identifies two circumstances under which this exculpatory clause would have been invalid: (a) if the language of the clause was ambiguous; or (b) if the clause waived Plaintiffs’ claims with respect to liability for occurrences “on or about the leased premises or any elevators, stairways, hallways, or other appurtenances used in connection with them.” On the contrary, the Court suggests that exculpatory clauses waiving liability occurring within premises that are “within the exclusive control of the tenant” shall remain valid.

Because the language of the exculpatory clause at issue is unambiguous, and the injury suffered by Plaintiff was within an area exclusively controlled by the tenant Plaintiffs, the Court finds no reason to invalidate the lease agreement’s exculpatory clause.

The Court further articulates the meaning of what constitutes “exclusive control of the tenant,” pointing to Shell Oil Co, which states a landlord’s mere ability to enter the premises fails to render the premises not under exclusive control of the tenant. In other words, even though a landlord may enter the premises, barring other circumstances, the tenant still maintains exclusive control of the premises. Similarly, here, the landlord Defendants’ ability to enter the premises for a “reasonable business purpose” did not give reason to find Plaintiff was not in exclusive control of the premises.

Plaintiffs further allege they had no control over the selection and purchase of the table that gave rise to the injury, suggesting Plaintiffs did not have exclusive control over the premises. However, the Court notes that Plaintiffs cite no relevant law supporting this position. Consequently, Plaintiffs’ theory is dismissed.

(2)  Effect of Exculpatory Clause on Plaintiff’s Negligence Claim

The Court finds the exculpatory clause at issue successfully waived Plaintiffs’ negligence claim, as the language of the clause clearly and unequivocally indicates Plaintiff and Defendants’ intent to do so.

In Maryland, “contracts will not be construed to indemnify a person against his own negligence unless an intention to do so is expressed in those very words or in other unequivocal terms.” (Aldoo v. H.T. Brown Real Estate, Inc., 686 A.2d 298, 302 (Md. 1996)). Furthermore, an enforceable exculpatory clause need not use the word “negligence” or any particular “magic words,” but must “clearly and specifically indicate the intent to release the defendant from liability for personal injury caused by the defendant’s negligence. (Id. at 304).


In the case at bar, although the exculpatory clause does not use the word “negligence,” Plaintiff nonetheless agreed to absolve Defendants from liability for any injury “occurring in, on or about the apartment of the premises.” Furthermore, Plaintiff agreed to absolve Defendants from “any liability or claim to the fullest extent permitted by law.” The Court concludes the only reasonable interpretation of this clause is that the parties intended to exculpate Defendants from all claims to the extent permitted by applicable law, which would include exculpation from claims of negligence. Accordingly, the Court finds the exculpatory clause effectively and unequivocally disclaims Defendants’ liability for their potentially negligent action with respect to the glass table that was instrumental in Mr. Nerenhausen’s injury.

The opinion is available in PDF.  

Monday, May 8, 2017

Under Armour, Inc. v. Ziger/Snead, LLP (Ct. of Special Appeals)

Filed:  April 27, 2017

Opinion by:
  Alan M. Wilner

Holding:  An award of losses in the amount of the value of time spent by principals and employees in performing litigation-related activities was proper, given an expense-shifting provision negotiated separately by sophisticated parties calling expressly for reimbursement in the event of losses.

Facts:  Appellant Under Armour, Inc. (“Owner”) engaged Appellee Ziger/Snead, LLP (“Architect”) to provide design and management services related to a construction project.  After a contract dispute arose, Owner withheld approximately $55,000.  In the Circuit Court for Baltimore City, Architect sued for the sum plus accrued fees while Owner counterclaimed for losses and damages suffered as a result of allegedly substandard work and inadequate management.

After the jury found in favor of Architect and awarded nearly $60,000, Architect filed a motion pursuant to the contract’s expense-shifting clause seeking nearly $300,000 in attorney fees, costs, expenses, and losses.  The court generally agreed and entered final judgment in the amounts of $182,735, $155, $42,830, and $62,190 respectively.  Owner paid all but the $62,190 awarded for losses and appealed the basis for such an award.

With respect to the losses claim, evidence presented below consisted of time tracking records and hourly rates charged by Architect’s employees in performing the kind of work the firm was engaged to perform.  Architect therefore sought not “lost profits” on new business but the value of the time its principals and employees were not able to devote to the pursuit of providing professional services to its other active clients.

Owner did not contest Architect’s accounting, but generally appealed that the court should not have awarded anything for “losses,” arguing (1) that the expense-shifting clause was not sufficiently specific to permit a claim for time spent by principals and employees performing litigation-related tasks, and (2) in any event the hourly rates were an inappropriate measure because Architect’s employees would have been paid regardless of whether they had been engaged in litigation-related activities or their usual work.

Analysis:
  The court began by dispensing with Architect’s initial position that the appeal concerned whether it had actually suffered losses, a question of fact which would necessitate a “clearly erroneous” standard of review.  Instead finding that the principal matter was one of contract construction and thus a question of law – whether the losses suffered were compensable under the contract’s expense-shifting provision – the court continued with its de novo review.

Focusing next on the contract itself, the court noted that the expense-shifting provision had been separately negotiated along with other provisions as an addendum to a standard form contract drafted by the American Institute of Architects.  The provision was not a mere general contract damages breach clause, but came into play only where the prevailing party had “[employed] counsel or an agency to enforce [the] Agreement,” and expressly provided for reimbursement of attorney’s fees, costs, expenses, and losses.  Although the contract failed to define losses, the court deemed the absence of such a definition within a document negotiated by sophisticated organizations not to be fatal.  Instead the court looked to intent and determined the lack of specificity to be precisely the point: avoiding the need to spell out each and every kind of loss that might accrue from breach.

So: did losses include diverted employee time to tasks that litigants typically undertake without compensation?  Finding support from a sundry list of cases decided in various states and Circuits, the court was persuaded that the issue was not whether employees would have in any event been compensated for their time, or whether the complaining party had incurred additional expenses or lost profits, but whether a breach had deprived the complaining party of services it had compensated its employees for providing.

Examining the record, the court noted unchallenged evidence of more than 300 hours spent in activities such as investigating facts, conducting discovery requests, preparing for and attending mediation, preparing for and attending depositions, and preparing for and attending trials.  Diversion of that many hours at hourly rates ranging $100 to $200 per hour from income-generating work to defend a meritless lawsuit for wrongfully-withheld fees constituted losses under the contract.  Accordingly, the court found no error in the lower court’s decision to award $62,190 in losses.

The full opinion is available in PDF.

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.