Friday, January 22, 2016

Wagner v. State of Maryland (Ct. of Appeals)

Filed:  December 17, 2015

Opinion by Watts, J.

Holding:  A party to a joint or multiple-party account may commit theft from that account.

Facts:  As of 2005, Father owned an IRA containing nearly $200,000 and a bank account containing a few thousand dollars.  Father added Daughter to the bank account after his wife died.  Between 2005 and 2009, $181,670 was transferred from the IRA to the bank account.  During that same time, $251,645 was taken from the bank account via withdrawals and wire transfers to Daughter’s accounts.  Father did not authorize such withdrawals and transfers. 

The trial court made the following additional factual findings:  (1) Daughter was added to the account to allow her to access the funds in the account if something happened to Father; (2) Daughter understood that the money in the account belonged to Father; and (3) Daughter withdrew funds from the account and used them for her own purposes. 

Section 1-204(f) of the Fin. Inst. Article provides: “unless the account agreement expressly provides otherwise, the funds in a multiple-party account may be withdrawn by any party or by a convenience person for any party or parties, whether or not any other party to the account is incapacitated or deceased.” 

Analysis:  Daughter argued that a person cannot be guilty of theft from a joint or multiple-party bank account if the person is a party to the bank account, because such person is an owner of the funds in the account.  The State argued that Daughter withdrew funds from the account without Father’s authorization and used them for her benefit.  The State asserted that FI §1-204(f) does not confer ownership of an account but instead provides authorization to withdraw funds from an account absent some other agreement between the bank and the parties to the account. 

The Court stated that having the ability to withdraw funds pursuant to FI §1-204(f) does not create an interest in or give ownership of the property to a party to the account.  While there is a rebuttable presumption of equal ownership of funds among parties to a multiple party account (see our summary of Morgan Stanley & Co. Inc. v. Andrews), the Court held that the evidence adduced at trial rebutted that presumption because the funds in the account were Father’s funds, Daughter was added for the sole purpose of accessing the funds if necessary and Daughter agreed to the arrangement.  A signature card that identifies Daughter as a “joint owner” is not dispositive of an ownership interest in the account.  The Court found nothing in FI §1-204(f) to prevent a conviction of theft and found the evidence sufficient to demonstrate the Daughter committed theft.

The Court also found the evidence supported a conviction for embezzlement (fraudulent misappropriation by fiduciary), which merged with the conviction for theft.  Because Father and Daughter knew the funds in the account were Father’s and Daughter was permitted to access funds in the account at Father’s direction and on his behalf, a fiduciary relationship “implying and necessitating great confidence and trust on the one part and a high degree of good faith on the other part” was created.  The Court noted that simply being a party to a joint or multiple-party account does not necessarily make that party a fiduciary.

The full opinion is available in PDF.

Thursday, December 3, 2015

Md. Comm’r of Fin. Regulation v. Cashcall (Ct. of Special Appeals)

Filed: October 27, 2015

Opinion by: Krauser, C.J.

Holding:

A company qualifies as a “credit services business” under the Maryland Credit Services Business Act only if the sole business activity is loan arrangement services and the business must directly receive compensation from a Maryland consumer.

Facts:

Defendant is a California company that marketed consumer loans through online services. Defendant referred consumers to two federally insured out-of-state banks and assisted the clients complete the loan application. If a customer met the lending requirements, one bank would process the loan, less an origination fee paid to the Defendant. Under the contract between the bank, Defendant must repurchase the loan amount – including all servicing and processing fees – owed by the consumer after the loan was disbursed. Additionally, the interest rates of these loans exceeded the permissible rates under Maryland law.

The Maryland Commissioner of Financial Regulation received numerous consumer complaints from 2007 to 2009. The Commissioner initiated an action in 2009, charging that Defendant operated as a credit services business without a license in violation of the Maryland Credit Services Business Act (“MCSBA”).

Analysis:

The court observed that, pursuant to the MCSBA’s legislative history, any company that receives payment directly from a consumer for loan repayment is subject to regulation under the MCSBA.  Any attempt by a company that provides consumer lending services and receives payment would undercut the law in opposition to the legislative intent of the law. Thus, the state would apply a broad view to regulate companies that operate primarily to provide consumer loans.

To define the term, “credit services business,” the Court reviewed Gomez v. Jackson Hewitt, Inc., 427 Md. 128 (2012). In Gomez, the Court of Appeals determined that Jackson Hewitt, Inc. had not violated the MCSBA. Jackson Hewitt offered tax preparation services and provided refund assistance lending (“RAL”) to qualifying customers, but did not directly receive any compensation from the customer for the RAL services. The Gomez Court ruled that Jackson Hewitt did not fit the legal requirements for a credit services business.

The Court distinguished Defendant’s services from Gomez on two key issues. First, Defendant received compensation directly from the consumers. Each loan processed by either bank was subject to the same “origination fee” which was then rolled into the repacked loan bought by Defendant. Consumers paid Defendant for the borrowed amount plus this origination amount. The Court concluded that Defendant “by collecting the origination fee paid by the borrowing consumer, received ‘direct payment’ from the consumers and therefore was . . .  a ‘credit services business’ under the MCSBA.” In contrast, Jackson Hewitt did not have a set origination fee which consumers never directly paid to the company for the loan services.

Second, Defendant fell under MCSBA regulation because it operated primarily and wholly as a consumer lending service. Defendant assisted consumers to complete the loan application, referred the loan to a bank, and repurchased the debt. The Court explicitly stated Defendant’s “loan arrangement service was . . . the only service [Defendant] provided.” Jackson Hewitt, on the other hand, primarily provided tax preparation services and only a small fraction of the consumers received RAL.


The full opinion is available in PDF.  

Wednesday, December 2, 2015

Sutton v. FedFirst Financial Corporation (Ct. of Special Appeals)

Filed:  October 29, 2015

Opinion by:  Graeff, J.

Holdings:  (1) The common-law fiduciary duties of candor and maximization of shareholder value articulated in Shenker v. Laureate Education, Inc. did not apply to a merger where shareholders received a mix of cash and stock consideration because the merger did not result in a sale or change of control of the target company.  (2)  Shareholder’s appeal is not moot even though rescission of merger would be impracticable, because shareholder could obtain rescissory damages in lieu of actual rescission if he were to prevail on his claims.

Facts:  Plaintiff, a shareholder of FedFirst Financial Corporation, sought to enjoin a merger between FedFirst and CB Financial Services, Inc., alleging that FedFirst’s directors breached fiduciary duties owed to FedFirst’s shareholders and that CB Financial aided and abetted the alleged breaches.

FedFirst began to explore a possible business combination with CB Financial in January 2013.  During the course of negotiations with CB Financial, FedFirst’s financial advisors were unsuccessful in soliciting other offers.  On April 14, 2014, after receiving a fairness opinion from its financial advisors, the FedFirst board unanimously approved the merger agreement with CB Financial, which was executed and announced that day.

The merger agreement provided that FedFirst shareholders would receive either  cash or shares of CB Financial common stock in exchange for each FedFirst share, at their election, subject to the requirement that 65% of the total shares of FedFirst would be exchanged for CB Financial stock and 35% would be exchanged for cash.  The agreement prohibited FedFirst from soliciting other acquisition proposals, but did not preclude it from considering unsolicited offers, as long as they were “superior proposals.”  If FedFirst terminated the agreement before consummating the merger it would pay CB Financial a termination fee.

On April 21, 2014, Plaintiff filed a class action lawsuit in the Circuit Court for Baltimore City against FedFirst, its seven individual directors and CB Financial, asserting both direct and derivative claims.  He later voluntarily dismissed the derivative claims, and on September 19, 2014, the Circuit Court dismissed the remainder of his claims with prejudice.  Plaintiff promptly noted his appeal, but did not move to stay the merger pending appeal, and on October 31, 2014, FedFirst and CB Financial completed the merger.

Analysis:  Plaintiff argued that FedFirst’s directors had breached common-law fiduciary duties of candor and maximization of shareholder value, as articulated in Shenker,, which held that directors owed such duties to shareholders in “cash out” mergers that effectively eliminated their interest in the target company without providing any interest in the acquiring company.  Shenker also established an exception to the general rule that a shareholder may only challenge a merger transaction in a derivative action (i.e., on behalf of the corporation), holding that a shareholder may bring direct claims when “the occurrence of appropriate events” triggers the aforementioned common-law duties to shareholder individually.  Plaintiff argued that  Shenker’s holding was not limited to “cash out” transactions, but that other “appropriate events” could give rise to fiduciary duties of candor and maximization of value to shareholders.

The Court conducted a detailed analysis of Shenker and agreed that its holding was not limited to “cash out” transactions, but that fiduciary duties of candor and maximization value are owed to shareholders when “the decision is made to sell the corporation,” the “sale of the corporation is a foregone conclusion,” or the sale involves “an inevitable or highly likely change-of-control situation.”  While the Court of Appeals declined to explain what factual scenarios may satisfy these triggering events, the Court looked to Delaware case law, which recognizes duties to shareholders only in the following scenarios:

(1) when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company; (2) where, in response to a bidder’s offer, a target abandons its long-term strategy and seeks an alternative transaction involving the break-up of the company; or (3) when approval of a transaction results in a sale or change of control (internal quotations and citations omitted).

The Court found none of these scenarios present with respect to the FedFirst/CB Financial merger.  Plaintiff did not allege that FedFirst initiated an active bidding process or abandoned a long-term strategy to seek to break up the company. Rather, the FedFirst directors merely explored options for a potential merger, which they would then present to the stockholders for approval.  The facts did not indicate that the sale of the company was a foregone conclusion. And, perhaps most importantly, the Court found that the mixed cash and stock consideration did not result in a sale or change of control of the company, noting that, “Unlike the scenario involved in the cash-out merger transaction in  Shenker, FedFirst’s shareholders in this case, by virtue of the stock portion of the merger agreement, have a continuing interest, including voting power, in the combined company, and they can participate in the future successes of CB Financial.”

For these reasons, the Court found that the duties articulated in Shenker did not apply, , that FedFirst’s directors were subject only to the ordinary managerial duties set forth in C.A. § 2-405.1 and were protected by the business judgment rule, and that Plaintiff had no basis for his direct claims against FedFirst and its directors.  The Court also dismissed Plaintiff’s aiding and abetting claims against CB Financial because it had found no underlying breach of fiduciary duties.

While the Court ultimately affirmed dismissal of Plaintiff’s claims on the merits, it rejected Defendants’ threshold argument that Plaintiff’s claims were moot because he sought to prevent a merger that had been completed while the appeal was pending.  The Court recognized that unwinding a long-completed merger involving more than two million publicly traded shares and an integration of corporate management would not be practicable, but found that the possibility of rescissory damages (i.e., the fair value of Plaintiff’s shares) had Plaintiff prevailed on the merits of his claims precluded a finding of mootness.

The full opinion is available in PDF.

Wednesday, November 18, 2015

Rigby v. Allstate Indem. Co. (Ct. of Special Appeals)

Filed: September 30, 2015

Opinion by: Krauser, C.J.

Holding:

Insurance policy covering “any dependent person in [insured’s] care” was not ambiguous and did not cover an adult, non-relative who lived in insured’s household but had a job, paid modest rent, and was not under the control of the insured.

Facts:

In June 2011, Plaintiffs were struck by an automobile that was negligently driven by Driver.  Driver was twenty-two years old at the time, and the automobile involved in the accident was owned by Insured.  Insured’s automobile insurance limit was $500,000, an amount Plaintiffs alleged was insufficient to cover their damages.  Insured also held an “umbrella” policy with Defendant that supplied up to $5,000,000 in coverage for negligence.

Driver had been living with Insured at the time of the accident for almost three years, though the two were not related. On three separate occasions, Driver moved out of Insured’s home, only to move back in.  For nearly two years, Driver did domestic chores in exchange for room and board.  Fourteen months before the accident, Driver obtained full-time employment earning $26,000 per year, and he agreed to pay $600 per month in rent to live with Insured.  After obtaining his job, Driver was also responsible for his own personal expenses such as food, clothing, and telephone, which had previously been paid by Insured.  Driver used Insured’s vehicle to get to and from work, but Driver was responsible for fuel costs. 

In sworn testimony, Driver referred to Insured as “father” and “family,” but Insured never claimed Driver on his tax return, never designated Driver as a beneficiary on his health insurance policy, and never gave Driver any money or credit cards.  Insured did not exercise any control over Driver’s comings and goings, and Driver was free to move out at any time, as he did on three occasions.

The umbrella policy held by Insured defined “insured person” to include “any dependent person in [Insured’s] care, if that person is a resident of [Insured’s] household.”  Defendant filed for declaratory judgment against Insured, Plaintiffs, and Driver seeking a determination of whether the Insured’s umbrella policy provided coverage for Driver’s negligence.  The trial court declared that Driver was not covered under Insured’s umbrella policy with Defendant, and Plaintiff appealed. 

Analysis:

The court observed that, pursuant to principles of contract interpretation, the insurance policy must be construed in its entirety, giving effect to each clause to the extent reasonably possible.  Moreover, in the event that an insurance policy contains ambiguous language, the language of the policy is to be construed liberally in favor of the insured and against the insurer as the drafter of the instrument.  A policy term is ambiguous if it is susceptible to more than one meaning to a reasonable person, but it is not ambiguous simply because it cannot be precisely defined as to make clear its application in all varying factual situations. 

Turning to the meanings of the terms, “dependent person” and “in the care of,” the court found that the terms overlap, but are not synonymous.  In keeping with the basic principles of contract interpretation, the court was to give effect to each clause and avoid treating either term as surplusage.  Finding that no Maryland cases defined these terms in context, the court turned to two out-of-jurisdiction cases, Girrens v. Farm Bureau Mut. Ins. Co., 715 P.2d 389 (Kan. 1986) and Henderson v. State Farm Fire & Cas. Co., 596 N.W.2d 190 (Mich. 1999). 

In Girrens, the Kansas Supreme Court found that although the term “dependent person” may have different meanings under different factual situations, it was not so ambiguous as to require construction in favor of the insured.  The Girrens court further defined “dependent person” as one who relies on another to provide “substantial contributions[,] without which he would be unable to afford the reasonable necessities of life.”  Adopting that definition, the court held that Driver was not a dependent person because he had a full-time job, paid a modest rent, and performed additional work for the Insured’s household.  

The court looked to Henderson for defining the phrase, “in care of.”  In that case, the Michigan Supreme Court found that the phrase is not ambiguous, but rather it is “a colloquial or idiomatic phrase that is peculiar to itself and readily understood as a phrase by speakers and readers of our language.”  The Henderson court then devised a non-exclusive list of factors to determine whether one person is “in care of” someone else: (1) a legal responsibility to care for the person; (2) some form of dependency; (3) supervisory or disciplinary responsibility; (4) provision of substantial essential financial support; (5) duration of living arrangement and whether it is temporary or permanent; (6) the age of the person receiving the care; (7) the physical and mental health status of the person receiving the care.  Although there was some form of dependency of Driver on Insured in that Driver was paying only a modest rent and using Insured’s care to get to and from work, the court found that the other seven factors supported the conclusion that Driver was not “in the care of” Insured.  Thus, there was ample evidence to support the trial court’s declaratory judgment for Defendant. 

The full opinion is available in PDF.  

Tuesday, October 27, 2015

Zorzit v. Comptroller of Md. (Ct. of Special Appeals)



Filed:  October 1, 2015

Opinion byJudge Douglas R. M. Nazarian

Holdings:  (1) Maryland Court of Special Appeals upheld Tax Court’s finding of fraud, holding that appellant taxpayer’s (“Taxpayer”) intent to defraud Maryland Comptroller of Admissions and Amusement tax revenues could be inferred from  circumstantial evidence of understatement of income, failure to maintain records, and concealment of assets.  (2) In the absence of Taxpayer’s relevant records of sales or income, the Comptroller’s tax liability assessment was supported by substantial evidence of reasonableness, making the Tax Court’s affirmance of the assessment not in error.  (3)  No actionable claim of spoliation occurred where duty to preserve and evidentiary advantage were not present.

Facts:  From 1993 until 2009, Taxpayer owned and operated a business providing video poker machines and other coin-operated entertainment to establishments.  Under Md. Code §17-405, 408, and 414 of the Business Regulation Article, it is lawful to operate video poker machines without making cash payouts, provided that the machines are properly licensed and taxes paid on all revenues generated.  However, Taxpayer ran afoul of the Code in several ways.  First, with Taxpayer’s knowledge and approval, proprietors of the establishments made cash payments to video poker winners, deducting the payouts from the profit split between Taxpayer and proprietors.  Second, Taxpayer kept no records of the cash payments, nor any records of individual revenues on a per-machine basis.  Third, Taxpayer calculated its tax liability net of the cash payments.

A wide-scale undercover police investigation conducted from 2006 to 2009 led to the seizure of 83 video poker machines owned by Taxpayer.  Forensic analysis of the motherboards allowed police to determine the in- and out-credits from each machine and compile the data into a report later issued to the Comptroller’s Office.  Although the investigating officers conceded that (1) proprietors likely did not pay out every credit won and (2) in- and out-credits from prior ownership of the machines could not be distinguished, the Comptroller calculated its assessment assuming that every out-credit was paid.  Applying its hypothesis that 55% of in-credits would be paid out, the Comptroller assessed a tax deficiency of $2,159,724.97 for the 2000-2009 period, added interest and imposed a 100% fraud penalty.

Taxpayer appealed the assessment to the Tax Court in 2013, arguing that the payoff percentage was more likely between 20 and 25% due to (1) proprietors often declining to pay out-credits and (2) the unreliability of the in- and out-credits data where significant number of video poker machines had been purchased used.  Accounting for these differences, Taxpayer’s expert testimony provided by a statistician placed the tax deficiency at $466,016.10.  Taxpayer further disputed the fraud penalty on the theory that neither his employed CPAs, his retained attorney, nor his staff were aware the payouts were taxable, thus Taxpayer lacked requisite intent to defraud.  The Tax Court was only partially persuaded, finding the record insufficient to change the Comptroller’s tax liability assessment, but using its discretion to adjust the fraud penalty to 50% by balancing the facts that the accounting was not perfectly accurate but Taxpayer’s fraud warranted a penalty.

Taxpayer filed petition for judicial review in the Circuit Court for Baltimore County which affirmed the Tax Court’s decision on June 5, 2014.  Taxpayer thereafter filed a timely notice of appeal.

Analysis:  Taxpayer presented the court with two questions for review:  first, whether the Tax Court erred in imposing its fraud penalty without a finding of intent to evade payment.  And second, whether the Tax Court erred in affirming an assessment based on admittedly erroneous assumptions and evidence the Comptroller failed to preserve.

The court began by pointing to a case both fully on-point and decided by the same court in 1993: Rossville Vending.  In that case, Rossville’s video poker units had been placed in establishments whose proprietors paid cash payments directly to winners, but Rossville paid no taxes on the cash payments.  Finding no ambiguity in the amusement tax statute’s operative phrase ‘gross receipts,’ the Rossville court found no room for reasonable argument for adjustments or deductions before calculation of the tax due.

Taxpayer pled ignorance: arguing that although he had personal relationships with Rossville Vending’s owners and knowledge of their business, he lacked actual knowledge of the Rossville court’s decision until after the Comptroller’s assessment, and so lacked any intent to withhold taxes.

The court next referenced Genie & Co., which held that direct evidence of fraud is unnecessary, but often inferred by circumstantial evidence.  The Genie court imported the federal “badges of fraud” doctrine to Maryland jurisprudence, highlighting seven factors to guide courts in identifying circumstantial evidence of fraud: 

  1. Consistent and substantial understatements of income (or sales, in the sales tax arena);
  2. Failure to maintain adequate records;
  3. Implausible or inconsistent explanations of behavior, including lack of credible testimony before a tribunal;
  4. Concealment of assets;
  5. Failure to cooperate fully with tax authorities;
  6. Awareness of the obligations to file returns, report income or sales, and pay taxes, and;
  7. Failure to file returns.
Finding substantial evidence of badges one, two, and four in the failure to keep records of gross revenues, concealment to avoid criminal liability, and faulty accounting methods recording net income by location rather than per-machine basis, the court agreed with the Tax Court that the badges of fraud analysis indicated an intent to conceal revenue.  Even were the Taxpayer’s claimed ignorance legitimate, the court further found the failure to research its tax liability to be willful blindness, and tantamount to fraud.  Accordingly, the court affirmed the Tax Court’s penalty.

Turning next to Taxpayer’s arguments against the Comptroller’s method of calculation, the court noted that the Tax General Article TG §13-403 anticipated situations where parties neglected to keep accurate records (emphasis added):
(a)  If a person … fails to keep the records required under §4-202 of this article, the Comptroller may
(1)    Compute the admissions and amusement tax by using a factor….
* * *
(b)  The factor utilized by the Comptroller pursuant to this section shall be developed by:
(1)    a survey of the business… including any available records
(2)    a survey of other persons… engaged in the same or similar business
(3)    other means.
The court continued, pointing out that the plain meaning of the statute indicated the legislature had vested broad discretion in the Comptroller to use reasonable methods for calculating assessments against parties like Taxpayer.   Indeed, the court found the Comptroller’s calculation methods to be supported by substantial evidence of reasonableness in light of the lack of relevant financial records.  Using the only records available – those obtained by the police’s forensic investigation – the Comptroller calculated Taxpayer’s tax liability as best he could.  As a result, the court found Taxpayer’s request to substitute his expert’s “guesstimate” for the Comptroller’s assessment notwithstanding Taxpayer’s failure to retain adequate records unconvincing.  Such a finding would lead Maryland companies to keep no records, file no returns, and refer the Comptroller to unverifiable memories of employees; an untenable result.  Thus the court found that the Tax Court did not err by relying on the Comptroller’s calculation.

Dealing finally with Taxpayer’s spoliation claim (which arose after a police agency destroyed the motherboards of the video poker machines), the court found the Comptroller lacked any duty to preserve the video poker machine motherboards because he neither possessed nor had access to them.  Moreover, no evidentiary advantage existed because both the Comptroller and Taxpayer had copies of the police report.  Accordingly, the court found no misbehavior to sanction.

The full opinion is available in PDF.