Monday, November 2, 2009

Bayly Crossing, LLC v. Consumer Protection Division (Ct. of Special Appeals)

Filed: October 5, 2009
Opinion by: Judge James R. Eyler

: Limited liability company violated the Maryland Home Builder Registration Act and the Maryland Consumer Protection Act by failing to register as a home builder and by failing to disclose its unregistered status to prospective purchasers of new homes. The LLC's liability stemmed from entering into contractual obligations to build and sell new homes even if LLC did not perform the actual construction. The LLC members were personally liable for these violations because they were found to have participated in, controlled, or had knowledge of the LLC'sunregistered home building activity.

: A limited liability company entered into form contracts to construct and sell new homes to individual buyers. The contracts disclosed that an affiliated corporation, closely held by the three members of the LLC, was registered as a home builder in Maryland and would perform the actual construction of the new homes. The contracts failed to disclose, however, that the LLC itself (designated as the "Seller" under each contract) was not registered as a home builder. Each contract also offered a one-year, limited warranty on the newly built home in exchange for the buyer's release of the LLC and its members from all liability relating to the construction. Prior litigation involving unregistered home-building activity by the affiliated corporation led to entry of a consent order, to which both the corporation and its principals (who would later also be the members of the LLC) were parties. The consent order prohibited the principals and "any entity with which they are or will be involved" from engaging in new home-building activities without first registering with the Maryland Home Builder Registration Unit of the Consumer Protection Division.

: By undertaking a legal obligation to "sell and construct" new homes to consumers without first registering as a home builder, the LLC violated the Maryland Home Builder Registration Act ("HBRA") even though its contracts disclosed that an affiliated corporation would perform the actual construction. The LLC also engaged in unfair and deceptive trade practices, in violation of the Maryland Consumer Protection Act ("CPA"), by failing to disclose its unregistered status in its contracts and promotional materials, thereby falsely implying to consumers that the LLC was lawfully authorized to sell new homes to consumers.

The members of the LLC were properly held jointly and severally liable for the LLC's statutory violations for two reasons.

First, they violated the prior consent order, which required both them and any entity with which they were or would become involved to register as home builders before engaging in any new home-building activity.

Second, consistent with the standard announced in Consumer Protection Div. v. Morgan, 387 Md. 125, 874 A.2d 919 (2005) for holding principals personally liable for corporate violations of the CPA, there was sufficient evidence demonstrating that the LLC members participated in, controlled, and had knowledge of the LLC's unlawful operation as an unregistered home builder. Also of note, the LLC itself was dismissed as a party to the appeal for lack of standing because its corporate charter was forfeited prior to the deadline to notice an appeal. The court held that revival of a forfeited corporate charter does not relate back to the filing of a notice of appeal by the corporation when it had no legal existence.

There are two significant practice pointers arising from this decision. First, by engaging in commercial activity that is subject to a comprehensive licensing and regulation statute enforced by an administrative agency, the actor is deemed to be making an implicit representation of a material fact to consumers that the actor is properly licensed and registered. Second, reflecting a growing trend in Maryland jurisprudence, corporate principals can be held personally liable for violations of these statutes under standards similar to long-held common-law principles imposing personal liability on corporate principals who direct, participate in, or cooperate in the commission of tortious activity by the corporation.

The full opinion is available in PDF.

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