Friday, February 3, 2017

Charles and Margaret Levin Family Limited Partnership v. Greenberg Family Limited Partnership (Cir. Ct. Mont. Cnty)

Filed:  December 27, 2016

Opinion by:  Ronald B. Rubin

Holding:  Judicial dissolution is an inappropriate remedy for deadlock over the identity of a managing member of an LLC where an LLC’s members have (1) a reasonable exit mechanism to receive fair value for their interest and (2) the Operating Agreement provides an alternative dispute resolution mechanism such as arbitration.

Facts:  Plaintiff and Defendant, each a family limited partnership involved in a series of commercial real estate transactions since the late 1980’s, jointly operated a lucrative office and retail complex.  Originally a general partnership, the joint venture’s organizational structure in 1999 converted to an LLC whose members were Plaintiff and Defendant, each with a 50% stake.

The Operating Agreement provided that Defendant would be the managing member with an initial 5-year term, followed by one or more successive 3-year terms if members unanimously consented to each successive term.  Expiration of the initial term was met with acquiescence by both parties, and Defendant continued to serve as managing member of the LLC.

By 2013, operation of Plaintiff’s family business had passed through several hands and a separation of interests was proposed.  Negotiations were contentious and unsuccessful.  By late 2014, Plaintiff accused Defendant of material breach of the operating agreement, alleging improper authorization of an increased property management fee and exceeding its term as managing member without consent.  At a members’ meeting, Defendant agreed not to increase the management fee, but refused to step aside as managing member.

Pursuant to the Operating Agreement, Plaintiff in 2014 filed a demand for arbitration to remove Defendant as managing member.  Defendant filed a complaint in circuit court seeking a declaratory judgment that the matter was not subject to arbitration.  Each party then withdrew their demands and attempted to negotiate a resolution.  Negotiations ultimately failed, and Plaintiff filed the instant suit in mid-2015.

Plaintiff sought relief in the form of a declaration that Defendant’s term as managing member had expired, and judicial dissolution of the LLC.  Defendant generally denied the allegations, sought a declaration that Defendant could remain as managing member, and requested that judicial dissolution be found an inappropriate remedy in such a dispute.

In March 2016, the court denied cross-motions for summary judgment and set a trial date for November.  By June, Plaintiff filed an amended complaint alleging the parties were deadlocked, and moved for a preliminary injunction for Defendant’s removal as managing member.  Plaintiff again requested judicial dissolution, but alternately requested appointment of a special fiscal agent.

At a preliminary injunction hearing in July, the court granted the motion in part, ordering removal of Defendant as managing member, but denied the request for judicial dissolution.  At the hearing, the court learned that the property management firm, although an affiliate of Defendant, had run day-to-day operations for over fifteen years without serious complaint.  The court found the parties’ unaddressed disagreements to be premised on the unsuccessful attempts to wind up the business, and allowed the property management firm to carry on in conformity with the Operating Agreement despite absence of a managing member.

In October, Defendant moved again for summary judgment, arguing that its removal as managing member rendered the complaint moot, and that any remaining operational or management disputes could be resolved by pursuing arbitration according to the Operating Agreement.  The court denied the motion in favor of full examination of the parties’ relationship, motive, and intent.

Analysis:  The court began by evaluating Plaintiff’s contention that judicial dissolution was the only remedy in light of the fact that without a managing member, the LLC could neither operate generally, nor operate in conformity with its Operating Agreement.  Examining the Operating Agreement, the court found several sections reserving sole authority to bind the LLC to the Managing Member or its specially authorized agents.  Further, the Operating Agreement plainly stated that mere status as a member did not vest with capacity to bind the LLC.  Noting that the practice of stockholders running a corporation might vitiate the protections of the corporate shield, the court concluded that leaving Plaintiff and Defendant as mere members would be improper.  Nor was the property management firm an appropriate substitute for a Managing Member.

The court went on to cite Maryland statutory law, noting that while judicial dissolution is appropriate only when “it is not reasonably practicable to carry on the business in conformity with the articles of organization or the operating agreement,” the statute failed to adequately define the phrase.  Md. Code Ann. Corps & Assn’s Art. §4A-903 (2015).  Nor had Maryland courts definitely construed the statutory language.  The court therefore looked to extent to which deadlock frustrated the purpose to which the LLC was created.  Finding Defendant, as prior Managing Member, had not abused its authority, unjustly enriched itself, or harmed Plaintiff’s economic interests, the court determined the business purpose of the LLC to have been faithfully fulfilled.

The court countenanced that judicial dissolution might have been appropriate but for the fact that the Operating Agreement specifically provided for arbitration as a dispute resolution mechanism.  Although Defendant reversed its initial pre-trial position that appointment of a managing member was not a proper subject of arbitration, Plaintiff failed to argue that Defendant was judicially estopped from taking this position.  Regardless, the court stated that because both parties’  2014 filings had been withdrawn voluntarily prior to the instant suit, judicial estoppel would not have precluded Defendant from taking such a stance.

Finding no ambiguity in the Operating Agreement’s dispute resolution mechanism, the court deemed judicial dissolution to be unnecessary.  The court went on to comment that the Operating Agreement also provided a reasonable exit mechanism in a dissenting member’s ability to exit and receive the fair value of its interest.  Subject to a right of first refusal with notification requirements, Plaintiff could have solicited offers for its interest, but failed to do so.  Further, Defendant in 2015 offered 50% of the appraised value of the joint venture.  Finding the price to be a premium over fair market value (given the limited marketability and/or lack of controlling interest), the court was satisfied in denying the request for judicial dissolution, finding arbitration to be a fair and equitable result.

The full opinion is available in PDF.

Tuesday, January 31, 2017

Stewart v. Jayco, Inc. (U.S.D.C.)

Filed: January 18, 2017

Opinion by: Ellen L. Hollander, United States District Judge

Holding:

In finding that no personal jurisdiction exists, the Court follows Maryland Court of Appeals precedent, applying a two-part test: (1) whether the requirements of Maryland’s long-arm statute are satisfied; and (2) whether the exercise of personal jurisdiction comports with the requirements imposed by the Due Process Clause of the Fourteenth Amendment.

Facts:

Plaintiffs  are Maryland residents who, on August 29, 2015, purchased a 2016 Jayco Seneca Motorhome from Camping World RV Super Center, a dealer located in Fountain, Colorado. Plaintiffs paid $153,081.90 for the Motorhome, which they allege has “been plagued by non-stop problems arising from defects in the manufacturing of the vehicle,” arguing violations of the Magnuson-Moss Warranty Act. Camping World RV Sales in Hanover, Pennsylvania and Camping World RV Super Center in Fountain, Colorado serviced the vehicle.

Defendant manufactured the Motorhome in question. Defendant relies on a declaration by Craig Newcomer, Consumer Affairs Manager of “Jayco Motorhome Group,” arguing Defendant has no ties to Plaintiff or the state of Maryland. Newcomer avers that Jayco does not maintain an office in Maryland; does not have any employees in Maryland; does not own any real estate in Maryland; has no bank accounts in Maryland; and does not directly advertise in Maryland. In addition, Defendant asserts it is not licensed to do business in Maryland and does not “directly” pay any taxes in Maryland.

In alleging that Defendant is transacting business in Maryland, Plaintiff relies on the fact that Defendant has a dealer in Maryland and that Defendant maintains a website that directs customers to dealers operating within Maryland. According to Newcomer, Defendant’s dealers are independently owned and operated and there is only one dealer in Maryland, (Chesaco) which holds three locations in Maryland, and with whom Plaintiffs never interacted.

Analysis:
           
 Reviewing the facts in a light most favorable to the Plaintiff, the Court addresses the issue of personal jurisdiction as a preliminary matter, determining whether the Plaintiff made his requisite prima facie showing. Furthermore, a threshold prima facie finding that personal jurisdiction is proper does not finally settle the issue; plaintiff must eventually prove the existence of personal jurisdiction by a preponderance of the evidence, either at trial or at a pretrial evidentiary hearing.

According to Fed. R. Civ. P. 4(k)(1)(A), a federal district court may exercise personal jurisdiction over a defendant in accordance with the law of the state in which the district court is located. Thus, the Court looked to Maryland law, which provides, “to assert personal jurisdiction over a nonresident defendant, two conditions must be satisfied: (1) the exercise of jurisdiction must be authorized under the state’s long-arm statute; and (2) the exercise of jurisdiction must comport with the due process requirements of the Fourteenth Amendment.” Carefirst of Maryland Inc. v. Carefirst Pregnancy Ctrs., Inc., 334 F.3d at 396; Carbone v. Deutsche Bank Nat’l Trust Co., No. CV RDB-15-1063, 2016 WL 4158354, at *5 (D. Md. Aug. 5, 2016).
           
Relying on Carbone, the Court held “when interpreting the reach of Maryland’s long-arm statute, a federal district court is bound by the interpretations of the Maryland Court of Appeals.” See Carbone, 2016 WL 4158354 at *5. “The Maryland Court of Appeals has ‘consistently held that the reach of the long-arm statute is coextensive with the limits of personal jurisdiction delineated under the due process clause of the Federal Constitution’ and that the ‘statutory inquiry merges with the constitutional examination.’” See Beyond Systems, Inc. v. Realtime Gaming Holding Co., 388 Md. 1, 22, 878 A.2d 567, 580 (2005). While the Maryland Court of Appeals recognizes a two-step analysis is standard, the Maryland Court of Appeals, and thus this Court, also recognize that, in some situations, exceptions exist wherein courts may decline to consider the first step if the analysis of the second step demonstrates conclusively that the personal jurisdiction over the defendant would violate due process. See Bond v. Messerman, 391 Md. 706, 721, 895 A.2d 722, 895 (2006). According to the Court, this case falls within this exception.

In evaluating whether a nonresident defendant is subject to personal jurisdiction under due process requirements, the Court looks to the United States Supreme Court, which has long held that personal jurisdiction over a nonresident defendant is constitutionally permissible so long as the defendant has “minimum contacts with [the forum state] such that the maintenance of the suit does not offend ‘traditional notions of fair play and substantial justice.’” International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). Courts have separated this test into two individual prongs: (1) the threshold of “minimum contacts,” and (2) whether the exercise of jurisdiction on the basis of those contacts is “constitutionally reasonable.” Due process jurisprudence recognizes “two types of personal jurisdiction: general and specific. CFA Inst. V. Inst. Chartered Fin. Analysts of India, 551 F.3d 285, 292 n. 15 (4th Cir. 2009). The Court determines that Defendant is not subject to general or specific personal jurisdiction, and as a result, the Court grants Defendant’s Motion to Dismiss.

In concluding no general personal jurisdiction exists, the Court relies on the rule from Goodyear, which states a court may exercise general jurisdiction over foreign corporations to hear “any and all claims” against the corporations “when their affiliations with the State are so ‘continuous and systematic’ as to render them essentially at home in the forum State.” Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915, 919 (2011). The Court also relies on Daimler, where plaintiffs sought to exercise general personal jurisdiction over defendant in California. Citing Burger King, the court of Daimler explained that Daimler, defendant, was neither incorporated in California nor did it maintain its principal place of business in California, and thus, “such exorbitant exercises of all-purposes jurisdiction would scarcely permit out-of-state defendants ‘to structure their conduct with some minimum assurance as to where that conduct will and will not render them liable to suit.’” Daimler AG v. Bauman, 134 S.Ct. 760 (2014).

In light of the facts at hand, the Court argues, “although Plaintiffs point to some contacts that Defendant maintains with Maryland, those contacts are not so continuous and systematic as to ‘render [Defendant] essentially at home in the forum state.’” Goodyear, 564 U.S. at 919. In addition, the court heavily relies on the fact that Defendant is not incorporated in Maryland; it is not registered and qualified to do business in Maryland; it has no employees in Maryland; and it does not maintain an office in Maryland. Regarding the Maryland dealership, the Court notes Chesaco also sells other brands of recreational vehicles, and that Defendant only passively directs customers in Maryland to purchase its products from Chesaco. Chesaco is independently owned and operated. For the above reasons, the Court ultimately concludes no general personal jurisdiction exists.

To determine whether there is specific jurisdiction over a defendant, the Court considers: “(1) the extent to which the defendant purposefully availed itself of the privilege of conducting activities in the state; (2) whether the plaintiffs’ claims arise out of those activities directed at the State; and (3) whether the exercise of personal jurisdiction would be constitutionally reasonable.” Consulting Eng’rs Corp. v. Geometric Ltd., 561 F.3d at 278 (4th Cir. 2009). The Court further relies on Burger King, where the court explains, “the ‘benchmark’ is not the ‘foreseeability of causing injury in another state.’ Rather, it is ‘foreseeability . . . that the defendant’s conduct and connection with the forum State are such that he should reasonably anticipate being haled into court there.’” Burger King Corp. v. Rudzewicz, 471 U.S., at 474 (1985).

Here, the Court finds no specific personal jurisdiction. The Court bases its determination on the fact that Plaintiffs did not purchase their Motorhome from or through Defendant’s Maryland dealer, nor did Plaintiff allege that they used Defendant’s website or that Defendant was in any way involved with Plaintiff’s decision to purchase a Jayco Motorhome in Colorado. Furthermore, the Court notes that after Plaintiffs bought the Motorhome in Colorado, they had it serviced and repaired in Pennsylvania. Plaintiffs failed to allege that any contacts between Defendant and the state of Maryland are related to, or give rise to, the cause of action. For the foregoing reasons, the Court concluded no specific personal jurisdiction exists.

In sum, although Defendant has some contacts with the state of Maryland, Plaintiff failed to establish that such contacts satisfy its prima facie requirement for either general or specific jurisdiction to support a finding of this Court’s personal jurisdiction over Defendant.

The opinion is available in PDF. 

Monday, January 30, 2017

Oliveira v. Sugarman (Ct. of Appeals)

Filed: January 20, 2017

Opinion by J. Adkins

Holding:  (1) The traditional business judgment rule applies to a disinterested and independent board of directors' refusal of a stockholder litigation demand, not the modified business judgment rule established in Boland v. Boland, 423 Md. 296 (2011). (2) Conversion of a performance-based incentive plan approved by stockholders to a service-based incentive plan approved by a board of directors does not give rise to a direct stockholder claim. (3) An incentive plan approved by stockholders does not constitute a contract unless such plan contains language "indicating a clear offer and intent to be bound." (4) Even when a corporation owes a direct duty to its stockholders, a stockholder must have suffered an injury distinct from the corporation to bring a direct claim.

Facts:  The board of directors of a Maryland corporation (the "Company") granted performance-based restricted stock (the "Original Awards") to certain of its executives and employees; however, the Company did not have enough common stock authorized to pay these Original Awards if they vested. In a letter to stockholders from the CEO, accompanied by the annual proxy statement, the CEO asked stockholders to approve the proposed long-term incentive plan (the "Plan"). The mailing also included a copy of the Plan, which authorized the issuance of an additional eight million shares of common stock. The Plan was approved at the annual meeting. The Company, however, did not meet the performance metrics for the Original Awards to vest until eight trading days past when the Original Awards were to vest. The board of directors and its compensation committee, in consultation with its advisors, decided to convert the Original Awards to service-based awards (the "Modified Awards") to balance rewarding management’s performance and enforcing the terms of the Original Awards.

Plaintiffs, trustees of a stockholder of the Company, made a demand to the board of directors to investigate the Modified Awards and institute claims on behalf of the Company against "responsible persons." The board of directors appointed an outside, non-management director to serve as the demand response committee. After investigation that included assistance from outside counsel, the demand response committee recommended the board of directors refuse the stockholder demand, which it did after a unanimous vote. Plaintiffs filed suit against the members of the board of directors and senior management alleging breach of fiduciary duty, unjust enrichment, waste of corporate assets, breach of contract and promissory estoppel arising from the Modified Awards. The Court of Special Appeals affirmed the trial court’s dismissal of Plaintiffs’ claims, holding that the trial court correctly applied the business judgment rule and Plaintiffs’ failed to plead facts sufficient to overcome the presumption of the business judgment rule.

Analysis: The Court refused to expand the modified business judgment rule established in Boland to all board of director decisions refusing a stockholder litigation demand, regardless of whether a majority of the directors are disinterested or the board used a special litigation committee ("SLC"). After a discussion of the development of the business judgment rule in Maryland, the Court distinguished this case from Boland because a majority of the board of directors of the Company were disinterested and independent as only one of the six directors at the time the Amended Awards were made actually stood to financially benefit from the board's decision (even Plaintiffs agreed that the board consisted of a majority of disinterested and independent directors when it approved the Amended Awards). Plaintiffs argued that, by refusing to extend the modified business judgment rule to any denial by a board of directors of a stockholder litigation demand, enhanced scrutiny by the courts would be limited "to those rare instances when shareholders are not required to make a demand on the board before bringing suit" and thus the modified business judgment rule would be rarely applied. The Court explained that Boland was not concerned with the feasibility of stockholder derivative suits and was intended to address those situations where a board of directors does not have a disinterested majority and appoints an SLC because the courts wanted to ensure the SLC was not "serving as a puppet for the interested board."

Turning next to whether the claims asserted by Plaintiffs were direct or derivative, the Court held that Plaintiffs did not suffer "a 'distinct injury' separate from any harm suffered by the corporation." Plaintiffs claimed they suffered three harms giving rise to a direct claim. First, they claimed to have suffered harm when the Original Awards were converted to the Modified Awards because the Company could no longer take advantage of the tax exemption provided for under § 162(m)(4)(C) of the Internal Revenue Code because, unlike the Original Awards, the Modified Awards were no longer made in connection with a stockholder-approved performance plan. Even though the Court noted that this alleged increased tax cost actually resulted in damages to the Company, not Plaintiffs’, they maintained that the Plan granted them contact rights that they could enforce directly. Applying New York law (the Plan was approved in New York and expressly provided it was governed by New York law), the Court held that the Plan was not a contract because it contained no offer to stockholders. The Court also held that, under Maryland law, the Plan was not part of a larger "intra-corporate contract" between directors and stockholders.

Second, Plaintiffs claimed as a direct harm that the actions of the board of directors caused them to make an uninformed vote. Relying on the doctrine of promissory estoppel, Plaintiffs argued that the board promised them the Original Awards would vest only if the performance metrics outlined in the Plan were met and that this promise induced Plaintiffs to vote to approve the Plan. The Court acknowledged that the language in the letter to stockholders that accompanied the proxy statement did urge approval of the Plan and stated that the Original Awards would vest "only if performance conditions are achieved." The proxy statement contained the same assurance and, the Court found that "[t]his language could constitute a clear and definite promise on the part of the Board." The Court also found that the board of directors had a reasonable expectation that its promises to stockholders regarding the vesting of the Original Awards would induce stockholders to approve the Plan because, in language in the letter to stockholders, the board stated its belief that "the significant shareholder returns required in order to meet the performance hurdles of these proposed equity incentive awards…make the overall compensation strategy a compelling one for shareholders." Further, the stockholders did in fact approve the Plan. However, the Court held that Plaintiffs’ were unable to meet the fourth element of their promissory estoppel claim. Looking to Delaware law, the Court held that casting an uninformed vote in and of itself is not sufficient harm to support a claim for promissory estoppel – Plaintiffs’ would need to show individual damages resulting from their uninformed vote, which they had not done.

Plaintiffs next claimed that they suffered a direct harm because the Plan diluted the value of their shares in the Company. The Court agreed that, under certain circumstances, "financial harm due to stock dilution could support a direct shareholder claim"; however, the Court held that such a circumstance did not exist in this case. Plaintiffs had not alleged share dilution in their complaint and, while they argued dilution on appeal, they failed to allege any facts detailing the financial or other impact of the alleged dilution.

Finally, Plaintiffs claimed that, even if they had not suffered a distinct harm, the Plan created a direct duty owed to stockholders by the board of directors and thus they should be able to bring a direct claim. While the Court acknowledged that a stockholder may bring a direct action if the board of directors breached a duty owed to stockholders, it held that the breach of duty alone is not sufficient to bring a direct claim – there must be some separate harm suffered. Therefore, to bring a direct claim, a stockholder would have to show that it suffered a harm distinct from the corporation as a result of the breach of duty owed by directors to stockholders.

The full opinion is available in PDF.  The author of this post is an attorney at Venable LLP, which represented the Company.  

St. Paul Mercury Insurance Company v. American Bank Holdings, Inc. (4th Circuit)

Filed: April 14, 2016

Opinion by: Niemeyer

Holding:  Service of process on a Maryland corporation’s resident agent constitutes service of process on the corporation.

Facts:  Defendant’s resident agent was served with a complaint and summons issued from a state court in Illinois on June 18, 2008.  Due to an internal oversight, defendant did not respond to the summons and the court entered a default judgement against it.  Eight months after receipt of the summons and after efforts to collect on the default judgment began, defendant notified its insurer of the lawsuit. 

The insurance policy provided that the insurer must be given written notice of any “claim … as soon as practicable.”  The policy also provided that a claim commenced on “the service of a complaint.”  Insurer denied coverage because of the late notice.  

Defendant eventually had the default judgment vacated and the lawsuit dismissed, which cost defendant $1.8 million.  Insurer sought a declaratory judgment that it had no duty to pay for the defense.  The district court ruled that “constructive notice via service of process on the insured’s resident agent, constitute[d] actual notice for purposes of triggering” its obligation to notify insurer and found the insurer to be within its right to deny coverage.  The Court affirmed. 

Analysis:  Defendant argued that its obligation to notify insurer was not triggered until it had actual knowledge of the complaint, which occurred after attempts to collect the default judgment began.  The Court noted that the Maryland General Corporation Law requires each corporation to designate a resident agent to receive service of process and further provides that service of process on the resident agent “constitutes effective service of process … on the corporation.”  Thus, the Court found service on the resident agent to be effective service on defendant, which triggered defendant’s duty to notify insurer “as soon as practicable.”

Defendant argued that it was not effectively served because its CFO was no longer employed when the resident agent forwarded the lawsuit papers to the CFO on June 19, 2008.  The Court stated that internal “corporate screw-ups” do not provide a basis to excuse providing timely notice to its insurer.  Rather, the Court stated that under Maryland agency law “knowledge of an agent acquired within the scope of the agency relationship is imputable to the corporation.”  Accordingly, the Court found that, under Maryland agency law, the defendant had actual knowledge of the lawsuit on the day its resident agent was served with process. 

The Court found the district court properly rejected defendant’s waiver and estoppel arguments. 

The opinion is available in PDF.