Thursday, March 17, 2011

The George Wasserman and Janice Wasserman Goldsten Family Limited Liability Company v. Kay (Ct. of Special Appeals)

Filed: February 9, 2011

Opinion by Judge James R. Eyler

Held: A claim brought by partners in a general partnership or members of an LLC against a managing partner or managing member will survive a motion to dismiss if they sufficiently allege they suffered harm directly and the managing partner or managing member violated duties owed to the partners or members.

Facts: Plaintiffs are partners in five real estate investment general partnerships and two real estate investment LLCs. Defendants are Mr. Kay, an individual that is the managing member or de facto managing member or partner of the partnerships and LLCs, and Kay Management Company, Inc. and Kay Investment Group, LLC, two entities controlled by Kay. Plaintiffs alleged Defendant took money from the partnerships and LLCs and invested the money with Kay Investment through Kay Management. In turn, Kay Investment invested the money with the Bernard Madoff entities. Plaintiffs brought suit following the Madoff ponzi scheme collapse.

The complaint set forth thirteen counts, including, among others, fraud, breach of fiduciary duties, conversion, civil conspiracy and negligence. The Circuit Court granted Defendant's motion to dismiss because none of the claims were individual, the derivative claims involving the partnerships were not agreed to by a majority of the partnership, and the failure to make demand on behalf of the LLCs was unexcused.


After a lengthy discussion of corporations, general partnerships and LLCs, the Court framed the principal issues on appeal as (1) whether Plaintiffs may assert individual claims against Kay and (2) whether Plaintiffs may bring derivative claims on behalf of the partnerships and LLCs against Kay.

(1) Individual Claims

Applying logic from Shenker v. Laureate Education, Inc., which permitted a shareholder to bring a direct action when the shareholder suffers the harm directly or duties owed to the shareholder have been violated, the Court extended the rationale to the law of partnerships and LLCs. The Court then concluded Plaintiffs sufficiently alleged (a) they suffered harm directly and (b) Kay violated duties owed directly to the Plaintiffs.

Plaintiffs alleged Kay took funds that were required to have been distributed. He also took funds required to be held in reserve, further injuring Plaintiffs by forcing them to replace the removed reserves.

Under the Revised Uniform Partnership Act, general partners owe each other, not just the partnership, fiduciary duties. Section 9A-405(b) of the RUPA "clearly provides a mechanism through which partners can sue other partners directly for breach of those obligations and others." However, there is no statute in Maryland expressly addressing LLC members' fiduciary duties. The Court, after finding managing members to be "agents for the LLC and each of the members, which is a fiduciary position under common law," again applied rationale from Shenker, to state where no statute precludes or limits fiduciary duties under common law, the underlying duties apply. Accordingly, the Court found Kay's fiduciary duties as the managing partner/member to run to the partnerships, the LLCs, the partners and the members.

(2) Derivative Claims

The Court found the term "derivative" inappropriate in a general partnership context. Derivative actions are necessary in a corporate and limited partnership context because shareholders and limited partners have no management rights. "Unlike shareholders and limited partners, however, general partners all have the ability to act on behalf of the partnership, and all have management rights." Accordingly, no need for a derivative action exists. The Court turned to whether minority general partners can bring claims against other partners. The Court cited many sections of RUPA to conclude all partners have equal ability to enforce rights involving partnership property. While section 9A-405(j) of RUPA requires unanimous consent of all the partners, the Court felt it should be tempered "when non-plaintiff partners have conflicts of interest." Instead, "the unanimity requirement should not apply to defendant partners and other interested partners."

However, based on the facts, the Court found a suit on behalf of the partnerships unnecessary because Plaintiffs adequately alleged an individual direct injury. If Plaintiff's prove the allegations, complete relief will be afforded. The derivative claims on behalf of the LLC were rejected for the same reason.

Note: In discussing fiduciary duties in the LLC context, the Court, citing section 4A-402(a) of the Maryland Limited Liability Company Act, notes that "one Maryland statute governing LLC operating agreements does suggest that provisions within operating agreements could alter existing duties or create other duties..." However, no such provisions were alleged in the case.

The full opinion is available in pdf.

Wednesday, March 16, 2011

Sherwood Brands, Inc. v. Great American Insurance Company (Ct. of Appeals)

Filed: February 24, 2011
Opinion by Judge Glenn T. Harrell, Jr.

Held: Pursuant to Maryland Code (1997, 2006 Repl. Vol.) Insurance Article Section 19-110, which provides that "an insurer may disclaim coverage on a liability insurance policy on the ground that the insured...has breached the not giving the insurer required notice only if the insurer establishes...that the lack of...notice has resulted in actual prejudice to the insurer," an insurer is required to demonstrate how it was prejudiced by late-bestowed notice so long as the claim against the insured arose before the expiration of the policy.

Facts: Sherwood (the "Insured") was issued a series of insurance policies by Great American Insurance Company (the "Insurer"). The most relevant policy (the "Policy") provided that Insurer would pay on behalf of Insured all "Claims" made against Insured during the Policy Period. Claims included civil proceedings made against Insured. The policy also provided that as a condition precedent to Insured's rights under the policy, Insured was required to provide written notice to Insurer of any Claim made against Insured during the policy period, including civil proceedings, as soon as practicable, but in no event later than ninety (90) days after the end of the Policy Period.

Two separate civil claims were filed and served on Insured within the Policy Period. However, in both cases, Insured failed to notify Insurer of the claims before ninety days after the expiration of the Policy Period. Insurer denied coverage of both claims stating that while both claims were covered by the policy, and that suits were filed against Insured within the Policy Period, Insurer did not receive notice of the suits until after the ninety-day notice requirement, and therefore was not obligated under the policy.

Insured filed a complaint and a motion for summary judgment in the Circuit Court alleging that Insurer breached the Policy by denying the claims. Insured also averred, regarding the claims, that Insurer was not prejudiced by any alleged delay in notification. Insurer denied any breach of the policies and asserted that coverage for the claims was barred due to Insured's failure to provide notice within 90 days after the end of the policy period. The Circuit Court agreed with Insurer's reasoning and granted its motion for summary judgment. Insured timely appealed to the Court of Special Appeals, and the Court of Appeals issued a writ of certiorari to consider "whether the lower court erred by ruling that Great American was not required by Section 19-110 of the Maryland Insurance Code to show actual prejudice in order to deny coverage based on the Sherwood's failure to comply with the notice condition of the [Policy] at issue."

Analysis: The Court engaged in a thorough historical review of relevant Maryland notice-prejudice legislation and case law to determine the status of the law today. The statute now governing notice-prejudice clauses in insurance policies is Maryland Code (1997, 2006 Repl. Vol.) Insurance Article Section 19-110. This statute provides:
An insurer may disclaim coverage on a liability insurance policy on the ground that the insured or a person claiming the benefits of the policy through the insured has breached the policy by failing to cooperate with the insurer or by not giving the insurer required notice only if the insurer establishes by a preponderance of the evidence that the lack of cooperation or notice has resulted in actual prejudice to the insurer.
Applying the text of Section 19-110, and the analyses and holdings from the cases reviewed by the Court, the court reached the following holdings:

First, the Court held that Section 19-110 does apply to claims-made policies in which the act triggering coverage occurs during the policy period, but the insured does not comply strictly with the policy's notice provisions. In this situation, Section 19-110 mandates that notice provisions be treated as covenants (rather than conditions precedent), such that failure to abide by them constitutes a breach of the policy sufficient for the statute to require the disclaiming insurer to prove prejudice.

Second, the Court held that Section 19-110 does not apply to claims-made policies in which the act triggering coverage does not occur until after the expiration of the liability policy, as this non-occurrence of the conditions precedent to coverage is not a "breach of the policy," as required by the statute.

The Court noted that its opinion may place Maryland jurisprudence at odds with the majority of other jurisdictions, but concluded that the text of, and the policies underlying Section 19-110, require the conclusions reached by the Court.

The full opinion is available in PDF.

Friday, March 11, 2011

In re Terra Industries, Inc. (Balt. City Cir. Ct.)

Filed: July 14, 2010
Opinion by Judge Evelyn Omega Cannon

Held: An exculpatory clause in a corporation's charter holding directors harmless from personal liability to the corporation or shareholders to the fullest extent of the law is enforceable, and it justified entry of summary judgment in favor of defendant directors. Section 1-102 of the Corporations and Associations Article is expansive and applies to every Maryland corporation and to all their corporate acts.

Facts: CF, a competitor of Terra, made numerous attempts to acquire Terra through unsolicited bids. Terra rejected those offers. CF bought Terra stock on the open market, which allowed it three seats on Terra's Board of Directors. Terra later told CF that it was not for sale and CF withdrew its offer to acquire Terra and announced it was no longer pursuing the acquisition. Unbeknownst to CF, Terra was entertaining other potential interests in its acquisition. CF later made another offer to acquire Terra which was accepted by the Board and the two companies merged.

Before the Terra/CF merger, four actions were filed, two of which were Maryland cases and consolidated into this action, alleging, among other things, that the individual defendants breached fiduciary duties by approving the Terra/CF merger. Terra's charter contained a provision which provides: "To the fullest extent permitted by statutory or decisional law . . . no director or officer of the Corporation shall be personally liable to the Corporation or its stockholders for money damages."

Analysis: The court found that the exculpatory clause was applicable, Plaintiffs had not pled facts of active and deliberate dishonesty, and the exculpatory clause may form the basis for granting a motion for summary judgment. Both section 2-405.2 of the Corporations and Associations Article and section 5-418 of the Courts and Judicial Proceedings Article of the Maryland Code allow the charter of a corporation to include any provision expanding or limiting the liability of its directors and officers. The court also found that actions taken in the sale or merger of a corporation are "corporate acts" as contemplated by section 1-102 of the Corporations and Associations Article and discussed in Shenker v. Laureate Education, Inc., 411 Md. 317 (2009).

The full opinion is available in pdf.

Wednesday, March 9, 2011

Pro-Football, Inc. v. Tupa (Ct. of Special Appeals)

Filed: February 28, 2011
Opinion by Judge Robert A. Zarnoch.

Held: Maryland courts will not enforce a forum selection clause that avoids application of Maryland’s workers’ compensation law.

Facts: Thomas Tupa, a former punter for the Washington Redskins, injured his lower back while warming up for a preseason game. Tupa filed a claim with the Maryland Workers’ Compensation Commission. After a hearing, the commissioner found that Maryland had jurisdiction over Tupa’s claim despite a forum selection clause to the contrary. The Maryland Circuit Court found, on appeal, that Maryland had jurisdiction as a matter of law. The issue was appealed to the Court of Special Appeals.

Analysis: The Court of Special Appeals affirmed the Circuit Court’s decision. Maryland’s Worker’s Compensation Act (the “Act”) provides that rights of employees under the Act cannot be waived. The court found that Maryland has a strong public policy in compensating employees for their injuries. Because the effect of the forum selection clause would be to avoid application of the Act, the court held that the forum selection clause contravened public policy.

The full opinion is available in pdf.