Wednesday, April 9, 2014

Mathews v. Cassidy Turley Maryland, Inc. (Ct. of Appeals)

Filed: November 26, 2013

Opinion by Judge Robert N. McDonald

Held: (1) Under the Maryland Securities Act (the “Act”), the offer and sale of a tenant-in-common (“TIC”) interest in commercial real estate under terms requiring a mandatory management contract with an affiliate of the seller and granting the purchasers only a limited opportunity to change management involves a “security.” (2) The statute of limitations periods for claims brought under the Act for sale of an unregistered security and for transacting business as an unregistered broker-dealer or agent are not tolled by the judicially created discovery rule of Poffenberger v. Risser, 290 Md. 631 (1981), or under the fraudulent concealment provision of Md. Code, Courts & Judicial Proceedings §5-203 (“CJ §5-203”). (3) The statute of limitations periods for claims brought under the Act for fraud in the offer or sale of a security and for transacting business as an unregistered investment advisor and for material misrepresentations made in that capacity are not tolled by the discovery rule of Poffenberger but may be tolled under the fraudulent concealment provision of CJ §5-203.

Facts: In 2003, petitioner, who had owned and managed rental properties for over forty years, sold eleven different properties through the respondent real estate brokerage for approximately $4 million. For favorable tax treatment petitioner sought to re-invest the proceeds in other real estate and based on the respondent’s advice, petitioner used much of the proceeds to purchase five fractional interests or TICs in various commercial buildings.

The TICs were all created by DBSI, Inc. of Idaho, or an affiliate. Purchasers of the TICs were required to retain DBSI or its affiliate as the property manager and in return the purchasers would receive a set annual rate of return on their purchase monies. The property manager could only be removed by majority vote of all TIC owners of a specific property and a new property manager could only be appointed by the unanimous consent of all the TIC owners. The TIC owners had no direct control over the property.

In 2008, after petitioner learned that DSBI would be suspending payments on certain properties, DBSI filed a voluntary petition for bankruptcy under Chapter 11 of the bankruptcy code. The properties subject to petitioner’s TICs were foreclosed. The bankruptcy court ultimately found DSBI’s transactions to have been constructively or actually fraudulent. The Securities Division of the Maryland Attorney General’s Office contacted petitioner in 2009 in the course of investigating the offer and sale of the TICs in Maryland. On March 23, 2010, the petitioner filed suit in Circuit Court against the respondent for violation of the Act, breach of contract and common law tort claims of fraud, negligent misrepresentation, negligence and constructive fraud. The Circuit Court granted summary judgment for the respondent on all counts finding in pertinent part that the TICs were not a security under the Act and, even if they were deemed a security, the petitioner’s claims were time barred. Following petitioner’s timely appeal the Court of Appeals granted certiorari to determine, inter alia, whether (1) the TICs are securities under the Act; and (2) whether the petitioner’s claims under the Act are time barred.

Analysis:  The Court of Appeals first analyzed the Act to determine if the TICs were securities. The Act broadly defines a “security” to include an “investment contract” but the meaning of the term “investment contract” was a matter of first impression for the Court.  The Court noted that when interpreting the Act, it may consider the federal Securities Act because the Act states that it is to be coordinated with the related federal law. Reviewing pertinent federal precedent, particularly SEC v. Howey, 328 U.S. 293 (1946), the Court determined that an “investment contract” was an investment of money in a common enterprise with an expectation of profits derived from the significant efforts of others.

In this case, the sole issue was whether the purchasers of TICs had an expectation of profits derived from the significant efforts of the property manager. The Court concluded that the Howey test was met because the profits were generated by the property manager’s actions. Even though the investors, acting collectively, had the authority to remove the property manager, the efforts by the property manager were no less dominant and essential to the success of the enterprise than are the efforts of the management of a corporation. The TIC investment was, therefore, held to be a “security” under the Act.

The Court then considered whether the petitioner’s claims under the Act were time barred. The petitioner’s private causes of action under the Act included allegations of respondent’s (1) offer and sale of an unregistered security, (2) transacting business as an unregistered broker-dealer or agent, (3) misrepresentations or omissions of material fact in the offer and sale of a security, and (4) violations of the investment advisor requirements of the Act (i.e., both lack of registration as an investment advisor and misrepresentations made in that capacity). The statutes of limitations under the Act for each of these various claims had lapsed.

The Court analyzed whether petitioner’s claims could be tolled by either (1) the Poffenberger discovery rule, which delays the accrual of the statute of limitations until when the wrong is discovered or when the wrong should have been discovered through reasonable diligence; or (2) CJ §5-203, which delays the accrual of the cause of action when the plaintiff remains ignorant of the cause of action due to the defendant’s fraudulent concealment.

Analyzing the private causes of actions under the Act, the Court found that Poffenberger discovery rule did not toll the relevant statutes of limitations. The Court compared the limitations provisions for the causes of actions involving lack of registration (of the security or as a broker-dealer) with the limitations provisions for causes of action involving misrepresentations and fraud. Citing Md. Code Corp. & Assn’s, §11-703(f)(1)&(2)(i), the Court noted that for the sale of an unregistered security or acting as an unregistered broker-dealer, a cause of action must be brought “after the earlier to occur” of (1) three years after the contract of sale or purchase; or (2) one year after the violation. On the other hand, citing Md. Code Corp. & Assn’s, §11-703(f)(1)&(2)(ii), the Court noted that for a violation of the anti-fraud provisions, a cause of action may not be brought “after the earlier to occur” of (1) three years after the contract of sale or purchase or (2) one year after “discovery of the untrue statement or omission, or after discovery should have been made by the exercise of reasonable diligence.” The limitations provision applicable to the investment advisor requirements likewise requires such a claim to be brought no later than the earlier of (1) three years “after the date of the advisory contract or the rendering of investment advice” or (2) two years after “the discovery of the facts constituting the violation.” Md. Code Corp. & Assn’s, §11-703(f)(3). The Court concluded that because the limitations provisions applicable to anti-fraud and investment advisor violations under the Act includes their own discovery rule, the legislature did not intend for the Poffenberger discovery rule to apply to those violations. Further, the legislature did not intend for the Poffenberger discovery rule to apply to registration violations because it did not include a discovery rule in the limitation for those violations, as it did for the anti-fraud violations. Thus, the Court held the Poffenberger discovery rule to not apply to these private causes of action under the Act.

The Court analyzed next whether CJ §5-203 applied to the private causes of action under the Act. It found that CJ §5-203 did not apply to the violations of the registration provisions because a reasonably prudent buyer could have discovered those violations from publicly available information at the time of sale of the unregistered security or sale by an unregistered broker-dealer. However, CJ §5-203 could toll the anti-fraud violations because the tolling arises from the affirmative misconduct of the defendant and has been held applicable to limitations as to both statutory and common law claims. Finding no indication that the legislature did not intend for CJ §5-203 to apply to claims of fraud under the Act if plaintiff’s acquisition of knowledge of the violation is hindered by defendant’s fraudulent concealment, the Court held that CJ §5-203 could apply to anti-fraud claims under the Act. Because the issue of fraudulent concealment is fact-intensive and the Circuit Court did not explicitly consider whether the undisputed facts negated tolling under CJ §5-203, the Court reversed the Circuit Court’s grant of summary judgment for the  respondent to the extent the counts under the Act asserted claims for fraud.

The judgment of the Circuit Court was affirmed in part and reversed in part and the case remanded back to the Circuit Court.


The full opinion is available in PDF.

Thursday, February 13, 2014

Gregg Lapointe v. SIGMA TAU Pharmaceuticals, Inc.

Filed: September 11, 2013 

Opinion by Michael D. Mason 

Holdings:  (1) A parent corporation is allowed to interfere with the subsidiary's contracts without liability under the "unity of interest" doctrine.  This privilege is not absolute, however.  It does not exist if the parent acts contrary to the interests of the subsidiary or interferes with a contract with a third party by use of wrongful means.  The burden of establishing a privilege lies with the complaining party. 

(2) If a privilege is found, it would extend to a shareholder with a controlling interest in the parent corporation. 

Facts:  Plaintiffs, former employees of corporate defendant's wholly owned subsidiary, alleged that the corporate defendant and its largest shareholder (also an individually named defendant) tortuously interfered with plaintiffs' long-benefit plan causing a refusal to pay benefits to which plaintiffs were entitled.  


Defendants filed motion to dismiss arguing that even assuming wrongful interference, no liability exists when a parent interferes in a contract between its wholly owned subsidiary and a third party because there is a "unity of interest" between the parent and its subsidiary.  The largest shareholder of the parent also claimed benefit to this doctrine.


Analysis:  Although Maryland courts have discussed the issue of whether the unity of interest doctrine applies to tortious interference claims involving a parent corporation and its wholly owned subsidiary, they have not adopted it.  In Copperweld Corp. v. Independence Tube Corp., the U.S. Supreme Court held that a parent corporation could not be prosecuted for an antitrust violation involving its subsidiary because a parent and its wholly owned subsidiary have a complete unity of interest. 

However, as the principle relates to a parent corporation’s liability for tortious interference with the contractual agreement of its subsidiaries, most courts that have adopted the doctrine have done so with limitations.  In Waste Conversion Sys., Inc. v. Greenstone Indus., Inc., 33 S.W.3d 779, 781 (Tenn. 2000), the Supreme Court of Tennessee held that a parent could lose its privilege if (1) acting contrary to its wholly-owned subsidiary’s economic interests the parent can be considered a third party to its subsidiary's contractual relationship and can be held for tortuously interfering with that relationship; and (2) it employs wrongful means even if the parent does not act contrary to the subsidiary's best interest.  Wrongful means is defined to include misrepresentation of facts, fraud, threats, intimidation, as well as a number of other acts, including any other wrongful act recognized by statute or common law.  The burden of proof lies with the plaintiff.

The full opinion is available in PDF.




Monday, January 27, 2014

MHD-Rockland Inc. v. Aerospace Distributions Inc. (Maryland U.S.D.C.)

Filed:  January 3, 2014

Opinion by Catherine C. Blake

Holdings:  (1) In a transaction between merchants, an acceptance that contains the words “subject to” along with additional terms does not render the acceptance “expressly made conditional on assent to the additional terms” for purposes of Section 2-207(1) of the Commercial Law Article.

(2) In a transaction between merchants, objection to the condition of goods and the return of such goods is not a timely objection of additional terms in an acceptance for purposes of Section 2-207(2) of the Commercial Law Article. 
Facts:  Plaintiff, through use of a purchase order, ordered four airplane wheel assemblies in “overhauled” condition from defendant.  Defendant sent the assemblies and an acknowledgment form representing that the assemblies were in overhauled condition.  The acknowledgment form further stated it was “subject to” the Conditions of Sale printed on the reverse side of the form, which purported to limit liability for consequential damages and disclaim any express or implied warranties.  Plaintiff returned two assemblies allegedly not in overhauled condition, which were therefore defective.  Disagreements arose whether the two returned assemblies were defective. 

Plaintiff alleged, among other claims, breach of contract.  Defendant argued plaintiff should not be allowed to seek lost profits because the contract expressly foreclosed any warranty, including liability for consequential damages.  Plaintiff claimed it rejected the conditions upon return of the assemblies. 
Analysis:  The Court applied Section 2-207 of the Commercial Law Article as the case involved a sale of goods between merchants.  Section 2-207 provides an acceptance containing additional terms is still an acceptance that forms a contract unless the “acceptance is expressly made conditional on assent to the additional or different terms.”  The Court noted that Maryland courts had not decided whether an acceptance “subject to” additional terms amounts to an acceptance “expressly made conditional.”  The Court agreed with cited precedent that concluded the “subject to” language does not make the acceptance expressly conditional on the buyer’s assent to the additional terms.  Accordingly, the Court held that defendant’s acceptance of the purchase order was not expressly made conditional on plaintiff’s assent to the additional terms in the Conditions of Sale.
 
Section 2-207 further provides that if there is an acceptance, the additional terms become part of the contract between merchants unless: “(a) [t]he offer limits acceptance to the terms of the offer; (b) [t]hey materially alter it; or (c) [n]otification of objection to them has already been given or is given within a reasonable time after notice of them is received.”  The Court noted that the plaintiff did not allege how and when it rejected the additional terms.  The Court stated that plaintiff’s objection to the condition of the assemblies does not amount to a timely objection to the additional terms in the defendant’s acceptance.  The Court dismissed the claim for lost profits from the alleged breach of contract. 
In a lengthy footnote, the Court also discussed an argument that the terms should be excluded from the contract because they materially alter the agreement.  The Court stated that such argument, if raised, would have failed under the applicable Maryland test. 

The full opinion is available in PDF.

Thursday, January 23, 2014

Lomax v. Weinstock, Friedman & Friedman, P.A. (Maryland U.S.D.C.)

Filed January 15, 2013

Opinion by Judge Catherine C. Blake

Holding: Under the doctrine of equitable estoppel, a party to a contract containing a mandatory arbitration provision cannot avoid arbitration of a claim against a nonsignatory to the subject contract when the basis for the claim is that contract.
 
Facts: Plaintiff Lomax financed the purchase of a car with a loan obtained through a retail installment contract (the “RISC”) with Credit Acceptance Corporation (“CAC”).  After CAC repossessed and sold the car it retained Weinstock to obtain a deficiency judgment against Lomax.  Lomax filed suit against Weinstock alleging the firm violated the Fair Debt Collection Practices Act, the Maryland Consumer Debt Collection Act and the Maryland Consumer Protection Act. Weinstock filed a motion to dismiss or, in the alternative, to stay the action and compel arbitration based on the RISC’s mandatory arbitration provision.
 
Analysis: It is settled that parties must submit claims to arbitration where they have a valid arbitration agreement and it covers the issues in dispute.  Lomax did not dispute the validity of the RISC or the arbitration agreement within it, but argued that Weinstock, as a nonsignatory to the RISC, could not invoke the arbitration clause.  The Court held, however, that when each of a signatory's claims against a nonsignatory makes reference to or presumes the existence of the written agreement, the signatory is equitably estopped from refusing to submit such claims to arbitration if the arbitration provision is sufficiently broad to encompass the claims.  Because Lomax relied on the RISC as the basis for her attempt to collect damages from Weinstock and the arbitration provision in the RISC was broadly worded so as to include claims against the seller’s attorneys, Lomax was estopped from disclaiming the mandatory arbitration provision contained in the RISC.
 
The Court granted the motion to dismiss.

The opinion is available in PDF

Wednesday, January 22, 2014

Doris Mitchell v. WSG Bay Hills IV, LLC (Maryland U.S.D.C.)

Filed December 11, 2013
Opinion by Judge Richard D. Bennett

Holding: A business operator does not have implied duty to protect the public from lawful actions of third parties partaking in the business’ activities.

Facts: Plaintiff was struck in the leg by a golf ball while living in a condominium adjacent to a golf course owned by the Defendant. Prior to this incident, occupants of the condominium complained to the Defendant after errant shots damaged the building. The Defendant elected not to alter the course because of costs. The Defendant moved for summary judgment arguing  it did not have a duty to protect the condominium residents.

Analysis: A business is not required to control the actions of third-parties lawfully partaking in business, unless a “special relationship” exists between the business and the injured party. In most instances a special relationship is created by either statute or contract. However, the Court acknowledged that a special relationship may be implied by either “(1) the inherent nature of the relationship between the parties; or (2) by one party undertaking to protect or assist the other party, and thus often inducing reliance upon the conduct of the acting party.” The Defendant did not have a direct relationship with the Plaintiff and the Defendants never offered to protect the condominium residents.

The Court granted the motion for summary judgment.
 
The full opinion is available in PDF.

Friday, January 17, 2014

Bhari Information Technology System Private Limited v. Sriram (Maryland U.S.D.C.)

Filed December 2, 2013
Opinion by Judge Paul W. Grimm

Holding:  A court should grant a motion to dismiss on arbitration agreement grounds only if the terms of the agreement are free from ambiguity. 

Facts:  Defendant was the sole stockholder of a consulting company, incorporated in Maryland, which he sold to Plaintiff, a Dubai corporation.  Defendant moved to dismiss on several grounds, one of which included to dismiss the proceedings pending arbitration, pursuant to an arbitration clause in the contract for sale of the consulting company. The arbitration clause provided, in its entirety: "Arbitration.  Any arbitration shall be in accordance with ICC rules."

Analysis:  "In determining whether parties have agreed to arbitrate the dispute in question, the Court should consider (1) whether a valid agreement to arbitrate between the parties exists and (2) whether the dispute in question falls within the scope of that arbitration agreement."  The Court further noted that if the terms are free from ambiguity the Court should grant the motion to dismiss on arbitration agreement grounds.  The Court found the agreement to be ambiguous and not appropriate for resolution on a motion to dismiss.  

The Court granted the motion to dismiss on other grounds.  Please note that it is not clear from the case whether the contract was governed by Maryland law.

The full opinion is available in PDF

Wednesday, January 15, 2014

Kimberly Pinsky v. Pikesville Recreation Council (Ct. of Special Appeals)

Filed: October 30, 2013
Opinion by Judge Robert A. Zarnoch

Held:

Directors and officers of an unincorporated nonprofit association may be held liable for contracts entered into by the association if they authorized, assented to or ratified the contract in question.

Facts:

Defendant, an unincorporated nonprofit association, hired plaintiffs to work in a pre-school. Before the end of their respective contract terms, defendant terminated plaintiffs pursuant to letters of termination. Plaintiffs sued defendant and its individual officers and directors to recover payments still owed to them, plus treble damages, attorney's fees, and costs. After a three-day bench trial, the circuit court entered judgment for plaintiffs, but rejected the claims against the individual directors and officers. The court also declined to grant appellants' motions for sanctions and for attorney's fees and costs. Plaintiffs appealed  the adverse judgment with respect to the individual directors and officers and the court's rulings on sanctions, attorney's fees, and costs.

Analysis:

The Court of Special Appeals noted that as an unincorporated association, defendant had at least some formal organization, as it operated under a constitution, bylaws and policy manual. Citing Littleton v. Wells & McComas Council, 98 Md. 453, 455 (1904) and Restatement (Second) of Judgements Sec. 61 cmt. a (1982) the Court found that unincorporated associations had the right to sue and be sued and that a judgement against the association alone does not reach the assets of its members.  Further, although no law explicitly permits unincorporated associations to enter into contracts, the Court indicated that this is a long-recognized and uncontroversial power (see Miller v. Loyal Order of Moose Lodge No. 358, 179 Md. 350, 356).

At common law, officers of an unincorporated association were personally liable for the debts of the association. Since the Court of Appeals= decision in Littleton, 98 Md. at 456, and the Legislature's subsequent enactment of the legislative predecessors to CJP  Sec. 11-105, a judgment rendered solely against an association does not, on its own, expose the association's officers to liability. Yet CJP Sec. 11-105 does not address whether the officers, if named personally, can be held liable in actions also brought against the association. The Court quoted Littleton, which observed that "[t]he statute does not take away the right existing at common law to sue the members of an unincorporated association, but the creditor has the option to sue either the association or the members; and, when the suit is against the former, a judgment obtained can only affect its joint property." The Court noted that it does not read Littleton as positing an either/or system of recovery.

Officers and other agents of associations, such as the defendant, are statutorily protected from personal liability for damages in any suit if the association maintains insurance coverage. CJP Sec. 5-406(b). The Court noted that, absent such insurance coverage, personal liability could attach.  The Court then turned to the case law of other states for a better understanding of when officers are personally liable, and since the majority of states have not enacted comprehensive statutes on unincorporated associations, the common law still generally covers the principles of liability.  The Court found a distinction in the case law between for-profit and nonprofit associations.  Individual liability of a for-profit organization is analyzed under partnership principles; individual liability of a nonprofit association is analyzed under agency principles. Therefore, in nonprofit associations, "a member is personally responsible for a contract entered into by the nonprofit association only - if viewing him as though he were a principal and the association were his agent - that member authorized, assented to, or ratified the contract in question." (See Karl Rove & Co. v. Thornburgh, 39 F. 3d 1273, 1284).  The Court went on to discuss ratification, authorization and assent to a contract.

The full opinion is available in PDF.

Thursday, December 26, 2013

BJ's Wholesale Club, Inc. v. Rosen (Ct. of Appeals)

Filed: November 27, 2013

Opinion by Lynne A. Battaglia

Held:  The Maryland Court of Special Appeals erred by invoking the State’s parens patriae authority to invalidate the exculpatory clause found in a liability waiver signed by the father of a five-year-old child who was injured at a kid’s club. 

Facts: Plaintiffs, mother and father, sued BJ’s Wholesale Club on behalf of their son, who was injured at the Club’s Owings Mills location.  The Incredible Kids’ Club, is a free supervised play area in BJ’s Wholesale club, where children can play while their parents shop at the warehouse.  Plaintiff’s son was in the club when he fell from a small apparatus onto the floor, resulting in a serious brain injury.  Prior to the day of the accident, along with other membership documents, the father had executed an agreement, which contained an exculpatory provision and indemnification language pertaining to the use of Kids’ Club. 

The complaint pled a cause of action in negligence.  BJ’s filed an Answer with a general denial in addition to a counterclaim alleging a breach of contract for failing to indemnify, defend, and hold BJ’s harmless pursuant to the indemnification clause.  In their Motion for Summary Judgment under Rule 2-501, BJ’s asserted that no factual matters were in dispute and that, pursuant to the Court’s decision in Wolf v. Ford, 335 Md. 525 (1994), the exculpatory clause was valid and the claim was barred as a matter of law.  Plaintiffs filed an opposition contending that the exculpatory and indemnification clauses were unenforceable, because they violated Maryland’s public policy interest of protecting children. 

The trial court noted that in general, Maryland courts have upheld exculpatory clauses that were executed by adults on their own behalf.  The trial court recognized that the issue of whether or not an exculpatory clause signed by a parent on behalf of their minor child was in fact one of first impression in Maryland.   In Wolf, the Court of Appeals had recognized three circumstances in which enforcement of an exculpatory clause could be precluded.  The trial court addressed the relevant exception, that public policy will not permit exculpatory agreements in transactions affecting the public interest.  Under Wolf, “transactions affecting public interest” fall into three categories.  Of those three, the only one relied upon by the trial court was a catchall category of the public interest exception to the validity of exculpatory clauses.  The trial court recognized this category was not easily defined, opining that while the Maryland Court of Appeals has intended to create a public interest exception, without further guidance, the trial court was not capable of evaluating the “totality of the circumstances” against a “backdrop of current societal expectations,” as it quoted from the Wolf decision.  The trial court closed by indicating that it did not have the ability to pronounce public policy grounds to invalidate the clause that the plaintiff had signed on behalf of his minor child, and granted BJ’s motion for summary judgment on the grounds that the exculpatory clause was valid. 

Analysis:  In their appellate decision, the Court of Special Appeals began by framing the issue as follows:  The central issue in this case is whether a parent may waive any and all future tort claims his or her child may have against a ‘commercial enterprise.’”  Rosen v. BJ's Wholesale Club, Inc., 206 Md. App. 708, 718 (2012)
To begin its analysis the Court of Special Appeals emphasized that Maryland case law provided very little guidance on the issue.  The Court turned to the appellate courts of other states, where they found that a substantial majority of states (majority view) that had “squarely considered whether a release agreement may bar future negligence claims of a child, have held that such agreements are invalid and unenforceable on public policy grounds.”   Their observation was that the minority view – states which held the exculpatory clause signed by the parent to be valid – only applied where a “commercial enterprise” was not the subject of the release, but instead where the release was of a claim against either a government agency or non-profit organization, or its agents.  The Court pointed to their observation that in nearly all of the other states where the majority view was adopted, the facts were nearly identical to those of the case at bar, in that a parent had executed, on his or her minor child's behalf, a release agreement (with or without an indemnification clause) in favor of a private commercial enterprise, usually as a pre-condition for allowing the child's access to and participation in some recreational activity.   While participating in that activity, the child sustained injuries, and suit was thereafter brought on the child's behalf.   In each case, the defendant entity attempted to shield itself from liability by invoking the release agreement, and the trial court granted summary judgment or a motion to dismiss.   Thus, all of the cases presented the same legal issue and were in essentially the same procedural posture. 

 With these considerations in mind, the Court first reflected on the Court of Appeals decision in Wolf.  Wolf v. Ford, 335 Md. 525 (1994).  However, where the trial court had stopped by expressing that it was not capable of evaluating the “totality of the circumstances” against a “backdrop of current societal expectations,” the Court of Special Appeals pointed to that third of the three exceptions discussed above – transactions effecting the public interest – and declared that such a backdrop may be found 1.) in the Plaintiffs claim 2.) in the Maryland Code and 3.) in Maryland common law, which, the Plaintiffs point out, reflected a substantial public interest in protecting children and their rights to seek redress for negligence, when that negligence results in injury to them.  The Court, in addition to relying on this wording in Wolf, rested their opinion on two other considerations.  First, they rooted their opinion on a perceived distinction between commercial and non-commercial enterprises.  Second, they based their decision on the exercise of the State’s parens patriae interest in caring for those, such as minors, who cannot care for themselves.  The Court of Special Appeals ruled the exculpatory agreement invalid and unenforceable. 

The Court of Appeals reversed.  In the Court’s review of the statutes and case law, they observed a reflection of a societal expectation that a parent’s decision-making is not limited.    The Court did not however believe that the plaintiff’s execution of an exculpatory agreement on behalf of their son was a transaction affecting the public interest within the meaning of Wolf, which otherwise would have impugned the effect of the agreement.   The Court took further issue with COSA’s opinion as to the perceived distinction between commercial and non-commercial enterprises.  The Court disagreed, and posited that the distinction between commercial and non-commercial entities is without support in Maryland jurisprudence.  The Court added that whether an agreement which prospectively waived a claim for negligence executed by a parent on behalf of a child should be invalidated because a commercial entity may better be able to bear the risk of loss than a non-commercial entity by purchasing insurance, is a matter for the legislature to consider.  Finally, the Court addressed COSA’s reference to the State’s parens patraie authority.  The Court clarified that the authority only reflects the State’s intervention when a parent is unfit or incapable of performing the parenting function, which was not alleged in the present case.

The Court concluded that they had never applied parens patriae to invalidate, undermine, or restrict a decision made by a parent on behalf of her child in the course of the parenting role.  The Court held the exculpatory agreement signed by the plaintiff on behalf of his son to be valid and enforceable. 

The full opinion is available in PDF here.





Saturday, December 7, 2013

United States of America ex rel. Cornelius Harris et al. v. Dialysis Corporation of America (Maryland U.S.D.C.)

Filed:  October 2, 2013
Opinion by Judge James K. Bredar

Held:  Relators brought four claims alleging Defendant violated the False Claims Act (“FCA”).  The Court held that Relators stated one viable claim for relief for Defendant’s alteration of Body Mass Index (“BMI”) numbers  in relation to Defendant’s billing the U.S. government for medical claims because BMI information was material to the Government’s payment approval decisions.  Relators’ three other claims were dismissed for failure to state a claim upon which relief can be granted or lack of subject-matter jurisdiction.

Facts:  Relators Harris and Boonie worked for Defendant Dialysis Corporation of America ("DCA") for approximately one year and both former employees’ responsibilities related to billing. 

In their suit against DCA Relators alleged Defendant violated four provisions of the FCA, 31 U.S.C. §3729 et seq. by knowingly presenting false or fraudulent claims for payment or approval to the Government, knowingly making false records or statements to get false or fraudulent claims paid or approved by the Government, conspiring to defraud the Government by getting false or fraudulent claims paid, and knowingly making false records or statements to conceal, avoid, or decrease obligations to pay the Government.  Specifically, Relators alleged Defendant altered Social Security numbers on medical claims, changed patients’ BMI numbers on medical claims, overbilled for Epogen, and overbilled D.C. and Ohio Medicaid.

Defendant moved to dismiss the Relators' complaint under Rule 12(b)(6) for failure to state a claim upon which relief can be granted.  Defendant’s motion to dismiss was granted in part and denied in part.

Analysis:  The Court first analyzed Relators’ allegation that Defendant altered Social Security numbers on Medicare claims.  The Court examined whether the alleged inaccuracy of the Social Security numbers was material to the Government’s decision to pay for or approve the claims, because the governing standard in the Fourth Circuit at the time this case was filed required a false statement to be material to the Government’s payment approval decision.  UnitedStates ex rel. Berge v. Bd. Trs., Univ. of Ala., 104 F.3d 1453, 1459-60 (4th Cir. 1997).  A false statement is “material” in the context of FCA claims if it “has a natural tendency to influence agency action or is capable of influencing agency action.”  Id. at 1460.  Since the Government relies on information other than just Social Security numbers to process Medicare claims, the Court found no plausible inference that inaccurate Social Security numbers were capable of influencing agency action.  The Court could not infer that Defendant made false, material statements to the Government in violation of the FCA, and therefore Relators’ allegations as to Social Security numbers failed to state a claim under Rule 12(b)(6).

The Court then investigated Relators’ claim that Defendant changed patients’ BMI numbers on medical claims in order that patients would qualify for Medicare reimbursement for excess dialysis treatments.  Relators stated that on multiple occasions, they personally observed Defendant enter the billing system and alter BMI numbers without the proper physician authentication.  Because a patient’s BMI number must be above a certain threshold for excess dialysis treatments to qualify for Medicare reimbursement, the Court found that these false statements were material and Relators stated a valid claim upon which relief could be granted.

Next, the Court analyzed Relators’ claim that Defendant overbilled for Epogen.  The Court found that this claim failed under both Rule 12(b)(1) for lack of subject matter jurisdiction and Rule 12(b)(6).  The claim failed under Rule 12(b)(1) because the first-to-file bar contained in the False Claims Act prevents bringing false claims actions related to civil actions for false claims already filed.  31 U.S.C.A. 3730(b)(5).  The Fourth Circuit follows a “same material elements” test when considering whether a fraud claim is barred under the first-to-file bar.  United States ex rel. Carter v. HalliburtonCo., 710 F.3d 171, 181-82 (4th Cir. 2013).  This claim failed because when Relators’ claim was filed, another case against Defendant was before the Court alleging the same material elements for overbilling of Epogen.

Finally, the Court considered the claim that Defendant overbilled D.C. and Ohio Medicaid.  Because Relators did not allege this fraud claim with particularity, the claim failed to meet the pleading standards of Rule 9 (b) and was dismissed.


The full opinion is available in PDF here.

Tuesday, November 19, 2013

Prospect Capital Corporation v. Adkisson, Sherbert & Associates (4th Circuit)

Filed: November 7, 2013 (unpublished)
Opinion by: Judge Andre Davis 

Held: the United States District Court for the Western District of North Carolina was not clearly erroneous and did not abuse its discretion  in ruling that (1) the parties reached a binding and enforceable oral settlement agreement; and (2) plaintiff did not proceed in bad faith, so neither a dismissal with prejudice nor an award of attorney's fees was appropriate.

Facts: Plaintiff made a $12 million commercial loan to a third party. After the third party borrower filed a voluntary Chapter 11 petition (which was converted to a Chapter 7 liquidation), plaintiff sued several defendants for the gross misconduct of their officers and directors.  Plaintiff entered into settlement negotiations with one such defendant, the third party borrower's accounting firm.  Even though counsel for plaintiff and defendant exchanged several draft settlement agreements, plaintiff refused to execute the agreement.  Defendant moved to enforce the purported agreement, to dismiss the complaint, and for an award of attorney's fees. 

Plaintiff alleged that defendant was negligent in providing inaccurate information about borrower's financial condition.  Counsel for the parties exchanged several emails and telephone conversations, during the last of which they agreed that defendant would pay plaintiff a sum certain in exchange for a dismissal of the action with prejudice.  Plaintiff stated in a court filing that the parties "have agreed to the principal terms of the settlement agreement, but require additional time to complete the drafting and execution of the settlement agreement." 

In November and December of 2011, the parties exchanged a total of six drafts, each containing the same material terms, including merger and integration clauses.  The parties eventually negotiated a "final" Confidential Settlement Agreement.  Defendant emailed an executed copy of the written agreement to plaintiff, followed a week later by the settlement check.  The day after defendant mailed the settlement check, plaintiff filed additional papers with the court requesting an extension of time and again representing that the parties "have agreed to the principal terms of the settlement agreement, but require additional time to complete the drafting and execution of the settlement agreement."  "Alas," the Fourth Circuit lamented, "the new year brought a refusal by [plaintiff] to execute the Confidential Settlement Agreement."  Plaintiff returned the settlement check to defendant and stated that it would not be executing a settlement agreement with defendant. 

Defendant moved to enforce the purported agreement, to dismiss the complaint, and for an award of attorney's fees.  After a hearing, the district court ruled that the parties agreed on the material and essential terms of a settlement.  The district court reasoned that several months of emails between counsel demonstrated an enforceable agreement because the material terms were settled.  Those terms included payment price and costs per side, mutual releases, and a confidentiality requirement.  The district court found that choice-of-law and venue provisions were not material terms because plaintiff accepted them willingly and without demanding additional consideration.  It found further that plaintiff's apparent dissatisfaction with the settlement amount was "simply a risk of litigation and the nature of its investment business . . . which are insufficient to set aside the remaining agreement."  Finally, the district court ruled that plaintiff was estopped from denying the existence of the agreement, after it had twice represented to the court that the parties had reached a settlement. 

The district court granted in part defendant's motion, ordering the parties to file a notice of settlement within 30 days.  The court denied defendant's motion for dismissal with prejudice, ruling that plaintiff had not acted in bad faith as required to support a dismissal with prejudice other than on the merits by FRCP 41(b).  Absent bad faith, the district court also declined to award attorneys' fees to ASA. 

Analysis: The Fourth Circuit held that the district court was not clearly erroneous in finding that the parties had settled on the material terms of the settlement agreement during a telephone conversation on November 22, 2011. The Fourth Circuit noted that plaintiff never made the agreement contingent on approval by its senior management, that there was no record evidence that the agreement depended on the execution of a writing, and that plaintiff represented to both defendant and to the district court that the parties had reached a settlement.  The Court declined to consider as moot defendant's cross appeal on the issue of bad faith and attorney's fees. 

The Fourth Circuit held further that the district court was not clearly erroneous in identifying the material terms of the agreement, and classifying as immaterial the choice of law, venue, and release provisions.  Plaintiff accepted quickly and without further consideration defendant's change of the choice of law and venue provisions from New York to North Carolina, demonstrating that these terms were not of "paramount importance" to Plaintiff.  The release provision was not a material term because defendant disputed it only once and ultimately accepted it.  Unlike a case cited by plaintiff, Chappel v.Roth , 548 S.E. 2d 499 (N.C. 2001), the parties did not condition their settlement on the negotiation of a specific release provision. 

Reviewing under a deferential clearly erroneous / abuse of discretion standard, the Fourth Circuit appeared to approve of the district court's consideration of the evidence.  The Fourth Circuit stated that it was "entirely proper for the district court to hear the evidence of the sequence of events that took place during the negotiations, as well as the settlement amounts considered and finally agreed upon." It stated further that the district court was correct in looking past the merger and integration clauses in the written settlement agreement.  That agreement was not fully executed because plaintiff did not sign it; "thus, those provisions could not, and did not, guide the district court's inquiry[.]"

The full opinion is available in .pdf.