Monday, November 30, 2009

Wilkens Square, LLLP v. W.C. Pinkard & Co., Inc. t/a Colliers Pinkard (Ct. of Special Appeals)

Filed: November 30, 2009
Opinion by Judge Deborah S. Eyler

Proof of dual agency must consist of evidence that the broker represented opposite sides of a transaction when the transaction took place. The mere co-existence of a brokerage agreement and a listing agreement does not constitute a dual agency as a matter of law in Maryland.

Facts: In early 2005, Colliers Pinkard entered into a brokerage agreement with Charles McMann Investments ("CMC") in which Colliers Pinkard would identify potential investment properties for CMC in the Baltimore City/Washington, D.C. area. By August 2005, the relationship between CMC and Colliers Pinkard had not proven successful and CMC and Colliers Pinkard decided that the brokerage agreement would expire on December 31, 2005.

In the meantime, Wilkens Square, LLLP decided to put up for sale an office building it owned at 300 W. Pratt Street in Baltimore City. On November 18, 2005, Wilkens entered into a listing agreement with Colliers Pinkard wherein Colliers Pinkard would serve as Wilkens' broker in the sale of the property.

In December 2005, CMC representatives met with Colliers Pinkard to view properties in the Baltimore area. Wilkens' Pratt Street property was not one of them. Colliers Pinkard suggested that CMC take a look at the Pratt Street property but did not accompany CMC on its visit.

The sale of the Pratt Street property was done by "controlled auction." CMC had shown interest in the Pratt Street property following its visit in December 2005 and as a result Colliers Pinkard added CMC to the list of potential buyers who would receive promotional material and information about the sale. CMC continued to show interest in the property and proceeded with the controlled auction. By February 2006, CMC was one of two remaining bidders on the Pratt Street property. Ultimately, CMC purchased the property on June 14, 2006. Prior to the closing, Colliers Pinkard sent an invoice to Wilkens for its commission under the listing agreement. Wilkens failed to pay Colliers Pinkard's commission.

Colliers Pinkard sued Wilkens for breach of contract seeking payment of its commission. Wilkens filed counterclaims for breach of contract, negligence, intentional concealment of material facts and conspiracy by a fiduciary.

The case in the lower court was tried before a jury which found for Colliers Pinkard on the breach of contract claim and against Wilkens on its counterclaims. The jury awarded Colliers Pinkard $226,321.67 for Wilkens' breach of contract. Wilkens appealed asserting: (1) the trial court erred in not finding, as a matter of law, that Colliers Pinkard was in a dual agency with Wilkens and CMC; (2) the trial court erred by not ruling, as a matter of law, that Colliers Pinkard's relationship with CMC was a material fact that Colliers Pinkard had a duty to disclose; and (3) that the trial court erred by not giving requested jury instructions.

Analysis: A real estate broker stands in a fiduciary relationship to his client. Because of the opposing interests of a buyer and seller in a real estate transaction, a broker cannot represent one without violating his fiduciary duty to the other. Under this theory, Maryland law has long held that a broker cannot profit from a transaction in which he represents opposing parties (a dual agency relationship) without the parties' consent. The court noted that "There are no Maryland dual agency cases that extend the commission forfeiture rule to situations in which a real estate broker . . . has represented two parties to a transaction at different periods of time."

Relying on the holding in Ricker v. Abrams, 263 Md. 509 (1971) that "proof of dual agency must consist of evidence that the broker represented the opposite sides to a transaction when the transaction took place", the court held that Colliers Pinkard was not acting as a dual agent because it did not represent CMC when the sale went forward or when the auction for the sale was held. As a result, the court held that there was no dual agency as a matter of law.

The court dismissed Wilkens' argument that the overlap of the brokerage agreement and the listing agreement from November until December 31, 2005 rendered Colliers Pinkard a dual agent. In its analysis the court explains that the prohibition on dual agency stems from the conflict between the interests of buyer and seller. At the time the contracts overlapped there were no conflicts between Wilkens' and CMC's interests such that Colliers Pinkard would have violated its fiduciary duty.

As to Wilkens' contention that Colliers Pinkard breached its duty to disclose a material fact, the court noted that "the materiality of a fact will depend upon the nature of the transaction and the effect, if any, the fact may have on its outcome." The court held that there was no evidence that Colliers Pinkard's contract with CMC would have been material to Wilkens with respect to the ultimate sale of its property.

Finally, Wilkens argued that the trial court erred in not providing jury instructions on the issue of when disclosure of dual agency must be made. The court dismissed this argument holding that "even if the court had erred by failing to instruct the jury on when disclosure should have been made, the error would not have been prejudicial," because the jury's finding that there was no dual agency rendered as moot the the issue of when disclosure must be made.

The full opinion is available in PDF.

Brass Metal Products, Inc. v. E-J Enterprises, Inc. (Ct. of Special Appeals)

Filed: November 30, 2009
Opinion by Judge Kathryn Grill Graeff

Held: To establish a claim for conversion, the plaintiff must first demonstrate that he or she had a property interest in property that was allegedly converted. Where the Defendant E-J Enterprises, Inc., ordered and paid for aluminum railings to store for Plaintiff Brass Metal Products, Inc., until Brass Metal requested delivery, E-J owned the railings until it sold them to Brass Metal. When E-J sold the railings to another company, it may have violated the business agreement between the parties, but its actions did not constitute conversion. The claim that E-J converted Brass Metal’s interest in the designs of the aluminum railings asserts intangible property rights. Conversion claims for intangible property rights are limited to situations where the intangible property rights are merged into a document that has been transferred. Where no such showing was made, the conversion claim failed.

Brass Metal alleged that, based on custom and usage, E-J converted the unpatented design of its railings. Brass Metal cites no case holding that custom and usage in an industry can create property rights that give rise to a conversion claim. Even if custom and usage could create property rights, Brass Metal failed to present sufficient evidence to establish that there was a uniform, definite, and well-established custom in the aluminum extrusion industry that a person who creates a die possesses a property right in the shapes created from the die.

Brass Metal failed to produce sufficient evidence to create a jury question regarding whether a confidential relationship existed between the parties, such that E-J had a duty to disclose its business dealings with Brass Metal’s competitor. Where two businesses are engaged in an “arms-length” transaction to further their own separate business objectives, a confidential relationship does not exist. E-J did not exercise the type of dominion and influence over Brass Metal that would establish a confidential relationship.

Facts: E-J, a wholesale metal distributor, entered into an agreement with Brass Metal to provide “just-in-time” inventory services, which entailed purchasing aluminum railings directly from aluminum extrusion mills, storing these railings, and selling them to Brass Metal as needed. The railings were designed by Brass Metal’s owner and President, James Burger, but Burger did not patent his railing designs.

In April 2006, E-J sold railings that were being held for Brass Metal to another company, Parthenon Installations. Thomas Martin, a Brass Metal salesman, owned a majority interest in Parthenon. In July 2006, when Burger discovered that Parthenon had established a manufacturing facility that was a “duplicate” of his facility, he fired Martin. Burger then requested that E-J stop selling railings based on Burger’s design to Parthenon. E-J declined Burger’s request and this lawsuit followed. Prior to trial, Brass Metal settled claims that it had brought against Parthenon, Martin, and Anastasios Pantoulis, another partner in Parthenon.

Analysis: At the outset of the opinion, the Court stated that:
Our review of the record, in the light most favorable to Brass Metal, reflects the following: (1) Brass Metal and E-J Enterprises entered into an agreement whereby E-J Enterprises would purchase railings from an aluminum extrusion mill and then supply the railings to Brass Metal as needed; (2) Brass Metal contacted mills and gave authority for E-J Enterprises to order railings from Brass Metal’s dies; and (3) Brass Metal may have given E-J Enterprises drawings of its designs to enable E-J Enterprises to order additional dies. Brass Metal points to no place in the record that supports its assertion that it gave E-J Enterprises dies, metallurgical formulas, trade secrets, or other confidential information.
As to Brass Metal's claim of conversion of its die designs, the Court found that Brass Metal did not obtain a property interest in the shapes and designs by custom and usage because custom and usage in an industry cannot create property rights that give rise to a conversion claim. Moreover, there would have had to be proof that the alleged custom and usage was “definite, uniform, well established, and so general that knowledge of it may be presumed . . . .” There was no such proof in this case.

As to the claim of conversion with respect to the aluminum railings, the evidence at trial established that E-J purchased aluminum railings from the mill, and it stored the railings until Brass Metal requested a delivery. Once the railings were delivered, Brass Metal was obligated to pay E-J within 30 days. Although selling the railings to other people may, or may not, have been contrary to the agreement between the parties, it did not constitute conversion.

As to Burger's claim of conversion of its dies, the Court found that Brass Metal failed to prove that E-J deprived Brass Metal's owner, the owner of the dies, possession of the dies.

With regard to various specific contracts and business relationships, the Court found that Brass Metal failed to adduce proof as to a number of the elements of tortious interference with contract.

As to the claim for deceptive concealment, the Court found that there was no confidential relationship between Brass Metal and E-J, since "[w]here businesses are engaged in an 'arm’s length' transaction, a confidential relationship does not exist."

Brass Metals also raised various evidentiary challenges, all of which were rejected by the appellate court.

Practice Pointers: Brass Metals could have avoided the problems it faced had it entered into appropriate agreements with E-J and its employees, such as Martin, and others, such as Pantheon, restricting their right to compete.

A copy of the opinion is available in PDF.

Tuesday, November 24, 2009

LTVN Holdings, LLC v. Odeh (Maryland U.S.D.C.)

Filed: November 5, 2009.
Opinion by: Judge Catherine C. Blake

Held: A non-resident defendant's assent to a forum selection clause in an Internet "clickwrap" agreement, alone, is sufficient to justify the exercise of personal jurisdiction over such a defendant and constitutes a waiver of any objection to venue.

Facts: Defendant LLC and its principal, citizens of Louisiana, obtained access to Plaintiff's Internet-based video content by registering on Plaintiff's website and accepting Plaintiff's on-line terms of use. The terms included a forum-selection clause, requiring that "any action to enforce this agreement shall be brought in the federal or state courts located in the State of Maryland." Plaintiff sued both the LLC and its principal in Maryland, alleging that they improperly tampered with Plaintiff's video content and passed it off on their website as the Defendant LLC's property. Defendants never visited Maryland and conducted no business there.

Analysis: The forum-selection clause in the Network Affiliate Agreement is valid, mandatory, and enforceable. Courts have routinely upheld such clauses where defendants clicked only once on a button indicating their assent to an on-line agreement containing those terms, even if they have not read the agreements. Defendant did not meet its "heavy burden" of showing that the forum-selection clause was "unreasonable, unfair, or unjust" in order to justify a judicial refusal to enforce it. As a result, Defendants' consent to the forum-selection clause, standing alone, is sufficient to confer personal jurisdiction in Maryland and makes venue in this district proper. Assent to the clause constitutes a waiver of objections to both personal jurisdiction and venue.

The plaintiff had previously prevailed in two other cases challenging the same type of contract provisions, Costar Realty Information, Inc. v. Field, 612 F.Supp. 2d 660 (2009) and Costar Realty Information, Inc. v. Meissner, 604 F.Supp. 2d 757 (2009).

Practice Pointer: Corporate principals, like the President of the Defendant LLC here, may be exposing themselves to personal liability merely by "clicking" their assent to an on-line service-provider's terms of use, even if the entity is the intended user of the on-line content. Such agreements may not distinguish between a user acting in his personal capacity and a user acting as agent for a corporate principal.

The full opinion is available in PDF.

Tuesday, November 17, 2009

CSR, Ltd. v. Taylor (Ct. of Appeals)

Filed: November 16, 2009
Opinion by Judge Clayton Greene, Jr.

Held: An Australian distributor of asbestos, who used the port of Baltimore as a conduit in shipping raw asbestos from Australia to U.S. customers located outside of Maryland, did not attain sufficient minimum contacts with the State of Maryland to be subject to the Court’s exercise of personal jurisdiction.

Facts: The personal representatives of two dockworkers who died from mesothelioma sued CSR based on the theory that the dockworkers became sick from the offloading of CSR’s raw asbestos from ships docked at the Port of Baltimore.

CSR acted as the exclusive distributor for a wholly owned subsidiary to sell asbestos to customers in the United States and regularly shipped distributions of asbestos through the Port of Baltimore. CSR regularly advertised its asbestos in a trade magazine that was published and circulated in the United States.

CSR also acted as the exclusive distributor of Australian sugar to customers in the United States and regularly used the Port of Baltimore to make such distributions.

The Circuit Court granted CSR’s motion to dismiss for lack of personal jurisdiction noting that CSR did not have any meaningful contacts with the State of Maryland. The Court of Special Appeals reversed finding that CSR’s packaging and shipping of asbestos to the Port of Baltimore was sufficient to establish such minimum contacts with Maryland as to render lawful the Circuit Court’s exercise of jurisdiction.

Analysis: A Maryland court may exercise jurisdiction over an out-of-state defendant if: (i) the requirements of Maryland’s long-arm-statute are satisfied, and (ii) the exercise of personal jurisdiction comports with the requirements imposed by the Due Process Clause of the Fourteenth Amendment.

Here, the court determined that it did not need to extensively consider the requirements of Maryland’s long-arm-statue because the Circuit Court’s exercise of jurisdiction would have offended the Due Process Clause

The Due Process Clause requires that an out-of-state defendant “have established minimum contacts with the forum state and that to hale him or her into court in the forum state would not comport with traditional notions of fair play and substantial justice.” The out-of-state defendant must “purposefully avail itself of the privilege of conducting activities within the forum state,” thus creating a substantial connection with the forum state. A substantial connection is forged when the out-of-state defendant either engages in significant activities in Maryland or creates continuing obligations with the State's residents.

CSR did not personally avail itself of the privilege of conducting activities within Maryland by shipping asbestos or sugar through the Port of Baltimore. CSR neither engaged in significant activities in Maryland nor created continuing obligations with residents of the State. CSR did not maintain a place of business in Maryland, nor was it licensed to do business in Maryland. CSR did not have a relationship with any customers in Maryland, nor with the Port of Baltimore dockworkers. In fact, CSR’s act of shipping asbestos and sugar through the Port of Baltimore was required by the unilateral activity of third parties.

CSR’s advertising of asbestos in a trade magazine published and distributed in the United States also did not satisfy the “purposeful availment” requirement because the advertisements did not target Maryland consumers.

The full opinion is available in PDF.

Friday, November 13, 2009

Saul Holdings Limited Partnership, et al. v. Raquel Sales, Inc. and Barefeet Enterprises, Inc. (Cir. Ct. for Mont. County)

Filed August 27, 2009
Opinion by Judge Durke G. Thompson

Held: When accelerated rent clauses provide for the payment to the landlord of a lump sum over a lengthy term and also allows the landlord the present possession of the leased premises with no incentive to mitigate its damages, the accelerated rent clause will be found to speculative and unenforceable as a penalty.

Facts: On or about January 23, 2006, Raquel Sales, Inc. (“RSI”) entered into a 10-year shopping center retail lease with Saul Holdings Limited Partnership for space in the South Dekalb Plaza Shopping Center in Decatur, Georgia and a 10-year shopping center retail lease with Briggs Chaney Plaza, LLC for space in the Briggs Chaney Shopping Center in Silver Spring, Maryland. Barefeet Enterprises, Inc. (“BFI”) executed a guaranty for each of the 10-year shopping center retail leases, whereby BFI guaranteed RSI’s performance under the terms of each of the leases, including payment of all obligations and liabilities under the terms of the leases.

On or about August 1, 2007, RSI abandoned the leased space in the shopping center in Georgia and failed to pay the rent and other fees due under the lease since October of 2007. RSI also abandoned the leased space located in Maryland in October of 2008 and ceased paying the rent and other fees due under the lease beginning in November of 2008. Saul and Briggs Chaney filed suit in the Circuit Court for Montgomery County for breach of lease against RSI and breach of guaranty against BFI seeking damages for unpaid rent and accelerated rent due under Section 29(c) of each lease.

The Court ruled that the accelerated rent due under Section 29(c) of the Georgia lease upon the breach of the lease was not permitted under Georgia law as liquidated damages, but was considered a penalty because the damages were too speculative and uncertain. The Court also found that Saul was entitled to any deficiency resulting from its re-letting of the leased space under its new 5-year lease with a replacement tenant.

With regard to Briggs Chaney, the Court similarly ruled that the accelerated rent due under Section 29(c) of the Maryland lease upon breach of the lease was not permitted under Maryland law as liquidated damages but was considered a penalty because it would disincentivize Briggs Chaney from mitigating its damages. Moreover, the Court determined that the length of the remaining lease term was far too long to fairly calculate Briggs Chaney’s damages resulting from RSI’s default. Thus it concluded that RSI was liable only for those damages resulting from Briggs Chaney’s inability to re-let the premises despite it using commercially reasonable efforts.

The Court also found BFI liable to each of Saul and Briggs Chaney for RSI’s default in accordance with the terms of the damage provisions set forth in each respective guaranty.

Analysis: In determining whether the accelerated rent due under Section 29(c) of the Georgia lease was liquidated damages or a penalty under Georgia law, the Court reviewed previous opinions of the Georgia Court of Appeals. Specifically, the Court applied the precedent set by the Georgia Court of Appeals in Peterson v. P.C. Towers, L.P., 206 Ga. App. 591 (1992), where the Georgia Court of Appeals held that accelerated rent provisions were enforceable liquidated damage clauses if the injury caused by the breach was difficult or impossible to accurately estimate, the parties to the lease intended to provide for damages rather than a penalty, and the sum stipulated in the accelerated rent provision was a reasonable pre-estimate of probable loss. This lead the Court to conclude that the damages provided for in Section 29(c) of the Georgia lease were too uncertain and speculative and, therefore, a penalty. Moreover, because Section 29(c) of the Georgia lease did not either require Saul to mitigate its damages by re-letting the premises or account for the possibility that Saul would re-let the premises, the Court found that awarding Saul the accelerated rent would provide Saul with present possession of the premises and a lump sum award for the lengthy 7 years remaining in the term, even though the awarded damages bore no relation to the actual damages suffered by Saul.

Although Maryland case law allows parties to a lease agreement to impose liability for rent, damages or any deficiency arising after re-letting premises, the question of whether accelerated rent provisions were permitted as liquidated damages had not been addressed by Maryland Courts. Because Maryland courts have generally enforced liquidated damages provisions that provide for a fair estimate of potential damages at the time that the parties entered into the contract and if the damages were incapable of being estimated at the time the parties entered into the contract, for Section 29(c) of the Maryland lease to be enforceable as a liquidated damages clause it would have to meet that standard. Briggs Chaney argued that Section 29(c) was enforceable as liquidated damages because it provided a reasonable estimate of potential damages by calculating the monthly rent at the amount due at the time of default and not at the increased amounts due in future months. Moreover, it contended that lease alleviated any concerns regarding awarding a lump sum payment of future rent for the remainder of the lease term because Maryland law required Briggs Chaney to mitigate its damages.

The Court ultimately held that Section 29(c) of the Maryland lease was a penalty and not enforceable as liquidated damages because it did not provide a fair estimate of the potential damages that would arise out of RSI’s breach of the lease. Rather, the lease provided for damages that were disproportionate to the damages that might be reasonably expected to result from RSI’s breach. As with Saul, the Court found that by awarding the lump sum provided for under Section 29(c), the Court would be providing Briggs Chaney a lump sum award for payment of rent for the remainder of the lengthy term and, at the same time, would allow the landlord present possession of the premises. As a result, Briggs Chaney would have no incentive to re-let the premises during the remainder of the term.

The Court also awarded the plaintiffs attorneys' fees and there is a brief discussion of the procedure and standards to be followed in awarding such fees.

The full opinion is available in PDF.

On November 2, 2009, the Court entered a judgment against RSI in the amount of $704,365.45 and against BFI in the amount of $402,970.53.

Thursday, November 12, 2009

Shenker v. Laureate Education, Inc. (Ct. of Appeals)

Filed November 12, 2009
Opinion by Judge Glenn T. Harrell, Jr.

Held: Where corporate directors exercise non-managerial duties outside the scope of §2-405.1(a) of the Maryland Corporations and Associations Article, such as negotiating the price that shareholders will receive for their shares in a cash-merger after the decision to sell the corporation has already been made, they owe their shareholders common law duties of candor and good faith efforts to maximize shareholder value and shareholders may bring direct claims for breach of those fiduciary duties.

In 2006 and 2007, Laureate Education, Inc., a publicly-held Maryland corporation, underwent a private acquisition process whereby several directors ("Board Respondents") and private equity investors ("Investor Respondents") purchased Laureate through a cash-out merger transaction.

In June 2006, Laureate's Chairman and CEO Douglas L. Becker informed the Board of Directors that he intended to make an offer to purchase Laureate, at which time the Board created a Special Committee composed of three independent directors, who retained a law firm and financial advisors. The Special Committee approved Becker's second offer to purchase Laureate for $60.50 per share and unanimously recommended that the Board approve the proposed transaction on January 28, 2007.

On January 30, 2007, various Laureate shareholders ("Petitioners") challenged the proposed merger on the grounds that the Board Respondents breached their fiduciary duty, that they conspired to breach those duties, and that they and the Investor Respondents aided and abetted that breach.

The Circuit Court granted Respondents' motions to dismiss, dismissing the action as an impermissible direct shareholder suit where the Petitioners had "failed to allege a cognizable duty owed them" by Investor Respondents.

In June 2007, Laureate announced that it had accepted an increased offer from Investor Respondents to acquire Laureate at $62 per share by way of a tender offer and second-step merger. The Special Committee's financial advisors again concluded the offer as financially fair, although several of Laureate's institutional shareholders disagreed, and the Board approved the transaction. Petitioners filed a second complaint in the Circuit Court alleging that the Board Respondents breached their fiduciary duties owed to Petitioners and the Circuit Court again dismissed the claims.

The Circuit Court held that a direct action against corporate directors for alleged violations of fiduciary duties is unavailable in Maryland because §2-405.1(g) forecloses exactly these types of claims. Petitioners appealed to the Court of Special Appeals, which affirmed the Circuit Court's dismissal, holding that §2-405.1(g) bars all direct shareholder claims and that any claims by shareholders against directors for breach of fiduciary duties must be brought derivatively on behalf of the corporation.

Analysis: The Court of Appeals disagreed with the Circuit Court and the Court of Special Appeals that §2-405.1(a) provides the only source of duties owed by corporate directors and that §2-405.1(g) bars all direct shareholder claims against those corporate directors for breach of their fiduciary duties. The Court held that such conclusions are erroneous and shareholders may indeed bring direct suits against corporate directors for breach of common law duties of candor and good faith efforts in particular circumstances, such as in the context of a cash-out merger transaction.

The Court stated that directors and officers owe a duty of care to the corporation and its shareholders under §2-405.1(a). Petitioners conceded that §2-405.1(a) governed the sole source of directorial duties in instances that involve the management of the business and affairs of the corporation. However, Petitioners argued, additional common law duties are triggered once a "threshold decision to sell the corporation has been made and which concern only matters personal to the shareholders." The Court agreed, holding that directors of Maryland corporations owe fiduciary duties of candor and maximization of shareholder value to their shareholders beyond those enumerated in §2-405.1(a) made outside the purely managerial context, such as when faced with an inevitable or highly likely change-of-control situation, and at least in the context of negotiating the amount shareholders will receive in a cash-out merger.

In the context of a cash-out merger, the Court stated, directors assume a different role than solely "managing the business and affairs of the corporation." The Court cited the pivotal Delaware case Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) numerous times in support of its holding that duties concerning the management of the corporation's affairs change after the decision is made to sell the corporation. Directors act as fiduciaries on behalf of the shareholders in negotiating a share price that shareholders will receive. The Court also stated that a 1997 opinion by the Maryland Attorney General suggests that the General Assembly did not seek to occupy the entire field of directorial duties owed by corporate directors in enacting §2-405.1(a), but instead intended to codify the duty of care owed by directors in exercising their managerial duties.

In addition to its holding regarding directors' fiduciary duties to shareholders in particular situations, the Court also held that the Court of Special Appeals erred in holding that §2-405.1(g) bars all shareholder direct claims. Claims for breach of common law fiduciary duties of candor and maximization of shareholder value may be brought directly by shareholders despite the language of §2-405.1(g). The Court held that Petitioners in this case were not restricted to derivative claims and could pursue direct claims for breach of fiduciary duty because the shareholders were owed direct fiduciary duties from the Board Respondents. In support of this holding, the Court noted that the injury alleged here, that shareholders received too low a value for their shares in a cash-out merger, was an injury suffered solely by the shareholders and not Laureate as a corporation. Laureate's interests would not be implicated by the price received by shareholders, nor would it suffer harm as a result of the price.

The Court agreed with the Court of Special Appeals and rejected the civil conspiracy claims, holding that "a defendant may not be adjudged liable for civil conspiracy unless that defendant was legally capable of committing the underlying tort alleged."

The Court also affirmed the Court of Special Appeals in rejecting the aiding and abetting claims, holding that the actions of the Investor Respondents were not out of the normal course of business practices.

The full opinion is available in PDF.

Monday, November 9, 2009

Duncan Services, Inc. v. ExxonMobil Oil Corporation (Maryland U.S.D.C.)

Filed: November 6, 2009
Opinion by Judge Alexander Williams, Jr.

Held: Plaintiffs' speculation regarding an anticipated assignment of their franchise contracts does not give rise to a cause of action for violations of the Petroleum Marketing Practices Act (the "PMPA") 58 U.S.C. §§2801-2806 or a breach of contract.

Facts: Sixty-five ExxonMobil motor fuel franchisees brought suit against ExxonMobil Oil Corporation, its affiliate ExxonMobil Corporation and two other entities to whom ExxonMobil had recently assigned some of its franchise contracts. This opinion involves the defendants' motion to dismiss claims brought by approximately fifty-five of the plaintiff franchisees whose franchise contracts had not yet been assigned by ExxonMobil (the "Non-White Oak Transaction Plaintiffs").

The Non-White Oak Transaction Plaintiffs claimed that ExxonMobil violated the PMPA through their "imminent" assignment of their franchise contracts. Additionally, the Non-White Oak Transaction Plaintiffs allege that the potential assignment of their franchise contracts would violate Maryland contract law.

Analysis: Under the PMPA a distributor may not terminate or fail to renew a franchise unless the termination or nonrenewal is based on one of the enumerated statutory grounds. The franchisee has the burden of showing that the franchise has been terminated through either actual or constructive termination. An assignment of a franchise agreement that is invalid under state law constitutes a constructive termination of a franchise in violation of PMPA.

Here, because the franchise contracts had not been assigned nor had the plaintiffs received a notice of the assignment of their franchise contracts, there was no basis for the plaintiffs to allege that the defendants had violated PMPA. The court held "Given the fact-specific nature of the inquiry into constructive termination, it is impossible for the Court to enter that inquiry absent at least the minimal information of to whom the contracts will be assigned and a definitive statement of intent to assign the franchises."

Additionally, the court held that the plaintiffs could not succeed on a breach of contract theory because they had not demonstrated that an actual breach of contract had occurred. Without an actual assignment of the franchise contracts the plaintiffs could not allege a breach.

Further, because the plaintiffs could not show either the termination of the franchise or existence of sufficiently serious questions going to the merits, the Court refused to grant a preliminary injunction or temporary restraining order blocking any assignment by ExxonMobile of the franchise rights.

The full opinion is available in PDF.

Saturday, November 7, 2009

Questar Builders, Inc. v. CB Flooring, LLC (Ct. of Appeals)

Filed: August 25, 2009
Opinion by Judge Glenn T. Harrell, Jr.

Held: Contract clauses allowing one party to terminate for "convenience" may be enforceable, subject to the implied obligation that the terminating party exercise its discretion in accordance with the implied obligations of good faith and fair dealing.

Facts: A contractor took bids from three subcontractors to install carpet in an apartment complex and entered into a contract with one of them. The contract provided that the contractor could terminate the contract for "convenience." When a dispute arose between the parties, the contractor terminated the subcontractor and hired one of the other bidders. As grounds for termination, the contractor alleged that it had cause - based on a failure to perform - as well as the right to terminate for convenience. The subcontractor objected, stating that it had not breached the contract and the contractor did not have an unfettered right to terminate.

At trial, the Circuit Court of Maryland for Baltimore County found that the subcontractor did not breach the contract. Regarding the contractor's right to terminate for convenience, the trial court rejected the contention that the contractor enjoyed a right to terminate for any reason. It rejected the contractor's assertion that its subjective loss of faith in the subcontractor satisfied whatever implied limitations there might be. Accordingly, the trial court concluded that the contractor terminated the contract improperly and awarded damages to the subcontractor. The contractor appealed.

Analysis: Before argument in the Court of Special Appeals, the Court of Appeals took the matter on its own initiative. The Court started with the principle that "illusory" contracts are not enforceable. A contract is illusory if "the promisor retains an unlimited right to decide later the nature or extent of his performance.”

The law prefers, however, to interpret contracts in a way that will render them effective rather than illusory. In addition, Maryland law implies an obligation to act in good faith and deal fairly with other parties to a contract. Accordingly, a party must exercise its rights in good faith and in accordance with fair dealing.

Consistent with this, the Court held that the contractor was not entitled to terminate for any reason whatsoever. Where the written right to terminate for no cause left off, "the implied obligation of good faith and fair dealing picks-up, thereby limiting the manner in which [the contractor] was permitted to exercise its discretion." The Court stated succinctly: "[The contractor] was permitted to terminate only if, in its discretion, it determined that continuing with the subcontract would subject it potentially to a meaningful financial loss or some other difficulty in completing the project successfully."

*The case contains an informative explication of the history and evolution of the concept of "termination for convenience."

The full opinion is available in PDF.

Thursday, November 5, 2009

Gebhardt & Smith, LLP v. Md. Port Adm'n (Ct. of Special Appeals)

Filed: October 29, 2009
Opinion by Judge Kathryn Grill Graeff

Held: Language in a Lease Agreement stating that the operating expenses payable by the tenants "shall be determined by Lessor's certified public accountant," is not a condition precedent to tenant's obligation to pay these expenses. Further, when a contract provides that a determination rendered by a designated person is "final," that determination is binding on the parties and cannot be contested in court in the absence of fraud or bad faith.

Facts: Gebhardt & Smith, a law firm, leased office space in Baltimore, Maryland, from 1977 until 2006 in the World Trade Center, an office building operated by Maryland Port Administration. The parties executed the lease at issue in 1992 and the tenant agreed to pay per month base rent, plus its proportional share of real estate taxes and operating expenses. The tenant challenged the operating expenses invoiced by the Landlord and did not pay any bills for operating expenses from 2003 to 2006 based upon a provision in the lease that provided that these expenses shall be determined by the landlord's certified public accountant.

Relying on this passage, the tenant argued that it was a condition precedent to its obligation to pay for operating expenses for the landlord to have an independent certified public accountant determine the actual operating expenses at year's end. The tenant also argued it was not precluded from contesting the certified public accountant's calculations as to the accuracy of the operating expenses.

The Circuit Court rejected the tenant's position. It held that the lease does not require an "independent" certified public accountant to determine the operating expenses and that the landlord complied with the lease provisions by employing its internal certified public accountant to determine the operating expenses. Further, the lower court noted that pursuant to the terms of the lease, which stated that the certified public accountant's calculations were "final," the tenant was precluded from challenging whether the operating expenses were calculated correctly.

On appeal, the Court of Special Appeals held the the lease provision at issue does not contain clear language providing that the determination of the operating expenses by the "Lessor's certified public accountant" is a condition precedent to the tenant's obligation to pay these expenses. The lease at issue does not contain language typically used to create a condition precedent, such as a statement that the tenant is obligated to pay operating expenses "if," "when," "after," or "provided that," "Lessor's certified public accountant" determines the operating expenses.

The Court further noted that even if lease contained a condition precedent, that condition had been fulfilled by the audit performed by the landlord's internal certified public accountant (the MDOT Office of Audits). The Court rejected the tenant's argument that the certified public accountant be "independent" should be reasonably implied since the lease referred to "Lessor's certified public accountant" and did not contain the word "independent." In that regard, the Court stated "if the parties to a contract intend that a certified public accountant specified in the contract be 'independent,' the contract would specifically state that requirement." The Court further noted that even if the term "independent" is considered an implied term in this matter, that the Landlord and MDOT Office of Audits satisfied that condition since "Certified public accountants are held to professional, ethical and work standards by the very nature of their training and certification."

Finally the Court held that, where a contract provides that a determination rendered by a designated person is "final," that determination is binding on the parties and cannot be contested in the absence of bad faith or fraud. The Court noted that generally parties to a contract are entitled to turn to the courts to resolve disputes arising from a contract, but that the parties to a contract can waive that right and provide that a designated person has authority to render a final and binding decision.

In order for the contract to foreclose or waive the right of a party to challenge or litigate the conclusions of a third party, the contract must use unequivocal language that unmistakably evidences the parties' intent that the third party's determination is final, binding, and conclusive. The language in the lease in question, that the statement of operating expenses be "determined by Lessor's certified public accountant," was deemed to be sufficient to show that parties' intent that the determination constitutes a "final determination" between the parties that can be challenged only on the narrow grounds of bad faith or fraud.

The full opinion is available in PDF.

Monday, November 2, 2009

Posey v. Comptroller (Maryland Tax Ct.)

Filed: October 29, 2009
Opinion by Chief Judge Walter C. Martz, II

Held: A physician severed his domicile in Maryland for tax purposes when he closed his professional practice in Maryland and manifested a subjective intent to be domiciled elsewhere.

Analysis: The Comptroller attempted to assess taxes against the plaintiff as if he were domiciled in Maryland. The plaintiff disputed the assessment, claiming he had severed his domicile in Maryland and established a domicile in Maine.

The court applied the two-pronged test for determining a change in domicile articulated in Shenton v. Abbot, 178 Md. 526 (1940):
  1. It must be shown that a new residence was acquired with the intent of remaining there;
  2. The abandonment of the old domicile must be so permanent as to exclude the existence of an intent to return.
To make a decision, the court examined the circumstantial evidence particular to the case. The court found several things material: the plaintiff acquired a new home in Maine, it was designed to be permanent, he signed a two year contract with a practice group in Maine, and he closed his Maryland practice and referred its patients to other doctors.

On that basis, the court concluded that the plaintiff clearly intended to abandon his domicile in Maryland. Accordingly, the Comptroller's assessments were reversed.

The full opinion is available in PDF.

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.