Thursday, September 13, 2018

WSC/2005 LLC v. Trio Ventures Associates (Ct. of Appeals)

Filed:  July 30, 2018

Opinion by:  Adkins, J.

Holding:  Although it is not recognized in the Maryland Uniform Arbitration Act (the “MUAA”), manifest disregard of applicable law is a proper ground to vacate an arbitration award.

Facts:  Plaintiff filed a petition to vacate an arbitration award in the Circuit Court for Montgomery County.  The petition argued that the arbitrator “manifestly disregarded well-established Maryland law in several respects” and that the arbitrator wrongly concluded the Plaintiff breached a contract provision.  Defendant moved to dismiss arguing that the Plaintiff did not allege any of the statutorily permitted vacatur grounds enumerated in the MUAA.

The MUAA governs the arbitration process in Maryland.  Once an arbitrator issues an award, a circuit court shall vacate an award on certain grounds enumerated in the MUAA.  The MUAA also provides that “the court shall not vacate the award or refuse to confirm the award on the ground that a court of law or equity could not or would not grant the same relief.”

Analysis:  The Court reviewed precedent decisions demonstrating that Maryland recognizes manifest disregard of the law as a permissible common-law ground for vacating an arbitration award.  The Court then analyzed whether the General Assembly abrogated the common law in this respect when it adopted the MUAA.

For an abrogation to occur, “the statutory language must indicate an express abrogation or an abrogation by implication by adoption of a statutory scheme that is so clearly contrary to the common law right that the two cannot occupy the same space.”  The Court agreed with Plaintiff that the MUAA does not pronounce an intention to expressly abrogate the common-law vacatur grounds.  The Court also agreed that the list of five grounds upon which a circuit court may vacate an award does not indicate the grounds are exclusive.  Further, the circumstances in which a circuit court cannot vacate an arbitration award under the MUAA do not include common-law vacatur grounds.

While disfavored, abrogation by implication is possible in two situations:  conflict preemption and field preemption.  The Court stated that conflict preemption does not apply because the common-law ground for “vacating an arbitration award will not conflict with any of the statutory grounds or render them nugatory.”  Field preemption occurs if a new enactment repeals and replaces the entirety of the prior law on a comprehensive basis.  Here, the Court stated that the MUAA’s “lack of universal applicability means the General Assembly did not preempt the entire field of arbitration common law.”

The Court then stated that manifest disregard of the law requires a “palpable mistake of law or fact appearing on the face of the award.  A court should look for an error that is readily perceived or obvious; an error that is clear or unquestionable.”  Finding no such mistake, the Court affirmed the Circuit Court’s dismissal.  

The opinion is available in PDF.

Thursday, August 30, 2018

Charles A. Peterson v. Evapco, Inc. (Ct. of Special Appeals)


Filed: July 5, 2018

Opinion by: Andrea M. Leahy

Holding: Pursuant to the “closely-related” doctrine adopted from other federal and state jurisdictions, a forum-selection clause in a Confidentiality Agreement may be used to assert personal jurisdiction over non-resident, non-signatories where the clause itself was valid; the claims arose out of the non-signatories’ status in relation to the Agreement; and the non-signatories were so closely related to the contract such that it was foreseeable for them to be haled into the forum court.

Facts: Appellees purchased a North Carolina cooling tower products company (the “Company”) from two spouses who are non-residents of Maryland (“Appellant Husband” and “Appellant Wife,” respectively). As part of the stock purchase agreement, Appellant Husband signed a Confidentiality Agreement that contained a non-compete clause and a forum-selection clause designating Maryland. Appellant Husband remained an employee of the Company until his termination for the conduct that forms the basis of the underlying lawsuit.

Appellees claimed that Appellant Husband had, individually and through two companies (the “Appellant Companies”) sold cooling tower products to Appellees’ customers. Appellant Companies are wholly owned by Appellants and were organized in North Carolina and Georgia, respectively. Appellees sued for breach of the Confidentiality Agreement and tortious interference of contractual relations, among other counts. Appellant Wife and Appellant Companies filed a joint motion to dismiss for lack of personal jurisdiction. The Circuit Court for Carroll County denied the motion.

Analysis:  Appellant Wife argued that she did not consent to jurisdiction in Maryland and did not execute the Confidentiality Agreement, and even if she had, it had expired. Appellant Companies argued that they had no contact with Maryland. Appellees initially argued that Appellant Wife transacted business in Maryland by signing the stock purchase agreement, which was governed by Maryland law, and that Appellant Wife and Appellant Companies are affiliates and alter egos of Appellant Husband. On appeal, Appellees argued that no analysis under the long-arm statute or due process was necessary.

On appeal, Appellees argued that the court could assert personal jurisdiction under the “closely-related” doctrine, which holds that a non-signatory to a contract may be bound by the forum-selection clause if the non-signatory is so closely related to a dispute that it would be foreseeable that it would be bound. The Court held that the doctrine applies to non-signatory, non-residents in the context of motions to dismiss for lack of personal jurisdiction, citing case law from various jurisdictions.

The Court adopted the three-prong test articulated in Carlyle Inv. Mgmt. LLC v. Moonmouth Co. SA, 779 F.3d 214 (3d Cir. 2015). The Carlyle Court had analyzed the application of the doctrine in the context of non-signatory defendants’ motions to dismiss for lack of personal jurisdiction in several Delaware cases. Carlyle held that a defendant who had not signed a subscription agreement was nonetheless bound by its forum selection cause because several of the agreement’s provisions explicitly referenced the close relationship among the various, inter-connected defendant entities. Likewise, the various non-signatory entities on the plaintiff’s side could enforce the clause because they were affiliates. Also, but for the original subscription agreement that contained the forum selection clause, the disputes at issue—concerning, in part, subsequent release agreements—would not have arisen.

Applying the Carlyle test, the Court held: (1) that the forum selection clause was valid; (2) that Appellees’ claims arose out of Appellant Wife’s and Appellant Companies’ status in relation to the Confidentiality Agreement; and (3) that Appellant Wife and Appellant Company were closely related to the contractual relationship so that it would be foreseeable that they would be bound. To determine the third question, the Court examined the non-signatory’s ownership of the signatory, its involvement in negotiations, the relationship between them, and whether or not the non-signatory received a direct benefit from the Confidentiality Agreement.

As for Appellant Wife, her husband’s execution of the Confidentiality Agreement was consideration for the sale of the Company, and the entire case is premised on his conduct—in concert with her and the Appellant Companies—that purportedly violated the Confidentiality Agreement. She was a signatory of the stock purchase agreement, which explicitly referenced the Confidentiality Agreement. Also, through her ownership of Appellant Companies, she directly, financially benefitted from her husband’s conduct.

As for Appellant Companies, Appellant Husband was a co-owner and an officer of both; he was the registered agent of one; the principal places of business were the home address; he had signed checks and tax forms on their behalf; and records confirmed that he had conducted business on their behalf. Appellant Companies had derived a benefit, as they had conducted business with Appellees’ suppliers and competitors. Appellant Husband alone involved the Appellant Companies in the situation at issue. To ignore this would allow Appellant Husband to evade the forum-selection clause and undermine the Confidentiality Agreement. Thus, the Court affirmed.

The opinion is available in PDF here.

Wednesday, July 11, 2018

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

Filed:  May 24, 2018

Opinion by:  Judge McDonald

Holding:

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

Facts:

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

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

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

Analysis:

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

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

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

The full opinion is available PDF.

Wednesday, June 13, 2018

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

Filed: May 17, 2018

Opinion by: Judge Anne K. Albright

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

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

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

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

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

Full text of opinion available here.

Monday, April 2, 2018

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

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

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

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

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

Analysis:

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

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

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

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

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

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

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

The full opinion is available in PDF.

Friday, March 30, 2018

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

Filed: November 29, 2017

Opinion by: Judge Rubin

Holding:

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

Facts:

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

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

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

Analysis:

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

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

The full opinion is available PDF.

Tuesday, March 27, 2018

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

Filed: August 31, 2017

Opinion by: Judge Michael D. Mason

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

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

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

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

Full text of opinion available here.

Monday, March 12, 2018

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


Filed: January 31, 2018

Opinion by: Judge James A. Kenney III

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

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

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

The full opinion is available in PDF.

Monday, March 5, 2018

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

Filed: December 15, 2017

Opinion by: Judge Ellen Lipton Hollander

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

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

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

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

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

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

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

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

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

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

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

The full opinion is available in PDF.