Tuesday, January 29, 2013

Penthouse 4C, LLC v. 100 Harborview Drive Council of Unit Owners (Cir. Ct. Balto. City)

Filed: June 5, 2012.
Opinion by Judge Evelyn Omega Cannon.

Held:   The Circuit Court for Baltimore City held that it had jurisdiction to confirm an arbitration award on a petition filed within 30 days after the arbitrators’ decision on a motion to modify the award, that the arbitrators did not exceed their jurisdiction in awarding the Plaintiff LLC the amount of costs of living and relocation expenses of the LLC’s sole member who was not a party to the arbitration, and that the award would not be vacated for manifest disregard of the law because the Defendant could not show that the arbitrators disregarded the law after understanding and correctly stating it. Finally, the Circuit Court refused to modify the specific performance part of the award based on Defendant’s evidence presented to the Court but not to the arbitrators.      

Facts: On March 9, 2010, the Plaintiff LLC, whose sole member was the primary resident of a condominium managed by the Defendant condominium council and directors, sued for specific performance and damages alleging that that the Defendant’s failure to perform required maintenance caused water exposure damage (mold) in the Plaintiff LLC’s condominium unit. The Plaintiff LLC’s sole member, an individual residing in the unit, was not individually named as a party to the suit.

The Circuit Court granted the Defendant’s motion to stay pending arbitration and after five days of hearings, on November 28, 2011 a majority of the three retired judges serving as arbitrators awarded the Plaintiff $1,252,487 in damages, including $433,722 for the sole member’s consequential costs, and ordered the Defendant to perform the required maintenance.
The Plaintiff filed a petition to confirm the award in the Circuit Court.   A day later the Defendant filed with the arbitrators a motion to modify the award as to what all agreed was an inadvertent mistake. On December 28, 2011 the majority panel issued its modification of the award, in part. On January 23, 2012 the Defendant filed in the Circuit Court a Petition to Vacate the Monetary Award and to Modify the Award’s order of specific performance.

Analysis:   The Circuit Court first addressed the Plaintiff’s claim that the Petition to Vacate was not timely filed. Relying on Mandl v. Bailey, 159 Md. App. 64 (2004)the Circuit Court found that an arbitration award, although final and complete when issued, is rendered incomplete and no longer final when a motion is timely filed with the arbitrator to modify the award, therefore tolling the 30 day period in which a petition to vacate the award can be filed with the Court. In accordance with Mandlthe Court found the Petition to Vacate was timely because filed within 30 days of delivery of the corrected award.

The Circuit Court next addressed whether the arbitrator panel exceeded its jurisdiction when making a $433,722 award to the Plaintiff LLC for consequential costs of the LLC’s sole member. The Court found that the Defendant participated in the arbitration without objection about jurisdiction or the appropriateness of a consequential costs award to the Plaintiff LLC’s sole member. The Circuit Court further found that the arbitration panel explicitly made the award to the Plaintiff LLC and not to the LLC’s sole member, therefore no jurisdictional issues were present.  

Next, the Circuit Court addressed the Defendant’s claim that the award for the consequential costs was “completely irrational” and a “manifest disregard of the law.” Although “manifest disregard of the law” is not stated as grounds to vacate an award in the Federal Arbitration Act or the Maryland Uniform Arbitration Act, the Court followed Sharp v. Downey, 197 Md. App. 123 cert. granted, 419 Md. 646 (2011) in applying the doctrine under principles of stare decisis. Reviewing authorities, the Circuit Court found that the “manifest disregard” standard requires some showing in the record, other than the obtained result, that the arbitrators knew the law and consciously disregarded it. The Circuit Court found that the Defendant never presented an issue to the arbitrators as to an award of the amount of the LLC’s sole member’s consequential costs and the arbitrators never provided any explanation for the award. In light of the Defendant’s silence, the award could not be “completely irrational” and the Defendant’s failure to refer the arbitrators to any law on consequential damages was fatal to the requirement of the “manifest disregard of the law” doctrine that the record show that the arbitrators were aware of the law and disregarded it.

Finally, the Defendant sought three modifications to the specific performance portion of the award: 1) incorporation of two Project Manuals that were not introduced into evidence, 2) allowing the Defendant to perform a peer-review of the Project Manuals, and 3) allowing value-engineering of the Project Manuals. Because the Project Manuals were not presented into evidence before the arbitrators, the Circuit Court could not conclude whether the proposed modifications would affect the award. Defendant also was silent during the arbitration hearing about peer-reviewing and value-engineering. Consequently, the Circuit Court denied the Defendant’s Petition to Vacate or Modify the Award and granted Plaintiff’s Petition to Confirm the Award.

The full opinion is available in PDF.

Monday, January 28, 2013

Hamot v. Telos Corp. (Cir. Ct. Balto. City)

Filed: May 21, 2012
Opinion by Judge W. Michel Pierson

Held: In an order denying motion for reconsideration, the Court held that Plaintiffs (directors of Defendant corporation) were not entitled to advancement of reimbursement of legal fees and expenses that Plaintiffs incurred in connection with their defense against a counterclaim filed by Defendants. The Court concluded that Plaintiffs could not affirm in good faith that the standard of conduct necessary of indemnification of legal expenses had been met. 

Facts: Plaintiffs were members of an LLC that owned preferred stock in the Defendant corporation.  Plaintiffs believed Defendant corporation wrongfully failed to pay dividends on the preferred stock.  Plaintiffs became members of the Board of Directors of Defendant corporation in hopes of changing accounting methods that calculate preferred dividend payment requirements.  Plaintiffs filed suit against Defendant corporation to require Defendant corporation to produce accounting documents and records necessary for Plaintiffs to perform their duties as directors. Plaintiffs also sent letters to the public accounting firm engaged to perform the annual audit of Defendant corporation's financial statements. The public accounting firm subsequently resigned from the audit citing a conflict of interest because members of the board of directors were not allowed to contact or influence the auditors.  Defendant corporation then filed a counterclaim against Plaintiffs for tortious interference with the contractual relations between Defendant corporation and its auditors and breach of fiduciary duty by Plaintiffs. 

Plaintiffs filed a motion seeking an order requiring Defendant corporation to advance reimbursement of legal fees and expenses that Plaintiffs incurred in connection with their defense against the counterclaim.  The motion was denied.  Plaintiffs then filed a motion for reconsideration. 

Analysis: Maryland law allows for the indemnification of legal expenses of officers and directors who are sued by reason of their service. Maryland law also allows for the advancement of legal fees pending the outcome of the final proceeding.  In order for a director to receive advancement of legal fees pending the final outcome, the director must: 1) make a written affirmation to the corporation of the director's good faith belief that the standard of conduct necessary for indemnification by the corporation has been met, and 2) provide the corporation a written undertaking by or on behalf of the director to repay the amount if it is ultimately determined that the standard of conduct has not been met. 

The standard of conduct required is set forth in Maryland statute section 2-418(b)(1), which provides that a corporation may indemnify a director unless it is established that the act or omission of the director was material to the matter giving rise to the proceeding, and was committed in bad faith, or was the result of active and deliberate dishonesty, or the director actually received an improper benefit in money, property, or services. 

The Court held that an affirmation of good faith is usually accepted as sufficient to show the directors believed their conduct met the standard, and that there should not be an overly intrusive examination into whether an affirmation was made in good faith.  However, the Court held that some review of the affirmation is permitted.  The Court ruled that the affirmation may be deemed invalid in situations where the record, objectively viewed, makes the maintenance of a good faith belief untenable.  Here the Court concluded that Plaintiffs were not entitled to an order of advancement because the facts on the record showed that Plaintiffs could not affirm in good faith that the standard of conduct necessary for indemnification of legal expenses had been met. 

The full opinion is available in PDF.
The denial of motion for reconsideration is available in PDF.

Friday, January 25, 2013

TIG Insurance Company v. Monongahela Power Company (Ct. of Special Appeals)

Filed: December 21, 2012
Opinion by Judge Shirley M. Watts
Held Pennsylvania law applies to the interpretation of insurance policies where the policies are delivered to and paid from a company’s office within that state.

Facts: Appellee, a Maryland corporation, is a holding company that purchased numerous insurance policies from various insurance companies (hereafter collectively referred to as “insurers”). Among these policies were four Excess Insurance policies issued by appellant, which provided indemnification of appellee for loss exceeding certain amounts. On each of these policies, appellee listed a New York address.

In 2001 and 2002, appellee demanded that the insurers indemnify it for costs related to the settlement of asbestos suits that triggered the policies and informed insurers to expect thousands of additional. Following these demands, one of the insurers filed a complaint against appellee and the other insurers requesting a declaratory judgment for the purpose of determining what obligations were owed under the policies. In 2010, appellee filed a motion for partial summary judgment requesting that the court find that Pennsylvania law apply to all policies made within a certain timeframe. It argued that the policies were “made” in Pennsylvania because the policies were accepted through payment of premiums by its insurance managers in that state.  Appellant joined in the arguments of another insurer, contending that New York law should apply due to appellee's headquarters there.  The trial court granted appellee’s motion for partial summary judgment.

Analysis: The court engaged in a thorough analysis of contract construction, explaining that insurance policies are contracts and under the doctrine of lex loci contractus, absent a contractual choice of law provision, a contract will be governed by the law of the state where the last act necessary to complete the contract occurs. For insurance policies, Maryland appellate courts have consistently held that this occurs in the state where “the policy is delivered and premiums are paid.” In this case, there was undisputed evidence that this occurred in Pennsylvania.  The record showed that: 1) appellee’s insurance department was located in Pennsylvania; 2) its insurance broker was also located in that state; 3) it was the general practice of appellee for insurance policies to be received by the insurance broker and forwarded to appellee’s Pennsylvania office; 4) it considered itself bound by a policy after the policy was received in its Pennsylvania office, at which point it would begin paying premiums; and 5) premium payments were made from its Pennsylvania office.

Appellant contended that New York law should apply because appellee was headquartered in New York, making it reasonable to conclude that the policies were delivered to that state. The court, however, noted that a company being headquartered in a state does not mean that all contracts into which the company enters are made in that state. Because appellant offered nothing to show that the policies were delivered to New York or that the premiums were paid from New York, the court affirmed the lower court’s grant of partial summary judgment and found that Pennsylvania law applies to the interpretation of the insurance policies.

The court went on to address a separate issue raised by appellant regarding whether, under Pennsylvania law, appellant is entitled to a set-off against the appellee’s loss which reflects the settling insurers’ proportionate shares of coverage for responsibility of the loss. 

The full opinion is available in  PDF.