Thursday, October 12, 2017

Sprye v. Ace Motor Acceptance Corp. (Cir. Ct. Mont. Cnty)

Filed:  September 29, 2017

Opinion by:  Judge Anne K. Albright

Holding:  Although Maryland is a “two-party” consent state under the Maryland Wiretapping and Electronic Surveillance Act and therefore requires prior consent by all parties to the communication prior to its interception, the Act does not reach interceptions made outside of Maryland.

Facts:  Plaintiffs were Maryland residents.  Defendant is a North Carolina corporation that provides sub-prime auto loans to Maryland consumers.  Defendant registered to do business in Maryland.  The sister of one Plaintiff listed the Plaintiffs as references on a car loan application without their knowledge.  When the loan went into default, Defendant began calling the Plaintiffs.  The calls were made from a Voice over Internet Protocol system provided by another company, which also operated outside of Maryland.  The calls were routed through servers in states other than Maryland, recorded and downloaded in data centers outside of Maryland. 

Plaintiffs alleged Defendant violated the Maryland Wiretapping and Electronic Surveillance Act (the “MWA”) by telephoning them from out-of-state and recording their conversations without their consent.  Defendant argued that the MWA neither reaches, nor imposes civil liability for, recordings made outside Maryland.

Analysis:  The MWA renders it unlawful to intercept any wire, oral or electronic communication and to disclose or use the contents of any such communication knowing or having reason to know that the information obtained through interception violates the MWA.  It is lawful under the MWA to intercept a communication where the intercepting person is a party to the communication and all of the parties have given their prior written consent.  The Court highlighted that interception is key and that for Plaintiff’s claim to be viable, the Court must conclude that the MWA reaches the out-of-state interception alleged.  Upon a plain reading of the statute, the Court held that the MWA does not reach out of state interceptions. 

Further, the Court disagreed with Plaintiff’s attempts to extend precedent regarding investigative and co-conspirator telephone calls involving admissibility of evidence.  Plaintiffs also argued that by agreeing to do business in Maryland, Defendant agreed to abide by the laws of Maryland.  The Court noted that Defendant did assent to the laws of Maryland by doing business in Maryland; however, the Court reiterated that the MWA does not proscribe the interception of telephone calls when it is done out-of-state.

The full opinion is available in PDF.  

Tuesday, October 10, 2017

Small Business Financial Solutions, LLC v. Pearl Beta Funding, LLC (Cir. Ct. Mont. Cnty)


Filed: September 29, 2017

Opinion by: Harry C. Storm

Holding: A claim that a small business finance lender tortiously interfered with a contract and with the rights of a senior secured lender under the UCC could not be resolved on summary judgement because the lender had entered into a loan agreement with a customer despite having notice of the terms of an agreement between the customer and another lender, and questions of intentionality and collusion central to the plaintiff’s claims were questions of fact.

Facts: Plaintiff loaned a Kentucky-based chiropractic practice (the “Practice”) monies, which would be repaid through daily bank account debits. Under the loan agreement, Plaintiff had a security interest in the personal property and proceeds of the Practice. Also, the Practice was prohibited from disposing of Plaintiff’s collateral outside the ordinary course of business. Furthermore, as conditions of default, the Practice was prohibited from (1) selling any existing or future account receivables to any third party without the Plaintiff’s consent or (2) entering into any financing agreement requiring daily or weekly repayments. 

Plaintiff filed a UCC-1 Financing Statement and sent Notice Letters to small business finance lenders, including a predecessor-in-interest to Defendant. The Notice Letters notified the businesses of the terms of the loan agreements and warned that engaging in activities that violated the terms constituted an interference with Plaintiff’s contracts.

Subsequently, the Practice sought additional loans, including one from Defendant. In its application, the Practice disclosed the existing loans with Plaintiff. Defendant learned of the daily debits to Plaintiff and of the UCC-1 Financing Statement. Defendant required the Practice to represent and warrant that contracting with Defendant would not cause it to default on any other loans. Under the loan agreement, Defendant would receive all of the Practice’s future accounts and payments from its clients, and a grant of a security interest in its property.

Two weeks later, the Practice asked Defendant to reduce the amount of its daily debits. One of Defendant’s representatives concluded that the Practice was overfunded, and Defendant temporarily reduced the debits. Subsequently, the Practice stopped paying both parties. Eventually, Defendant was repaid in full and the Practice and Plaintiff came to a settlement.

Analysis: 

Plaintiff sought relief under two theories: tortious interference of the loan agreement and interference of Plaintiff’s rights as a senior secured lender under Maryland UCC Section 9-625. Defendant moved for summary judgment, which the Court denied because the issues could not be resolved as a matter of law. The summary judgement standard requires the Court to enter judgement where there is no genuine dispute as to any material fact and a party is entitled to judgment under matter of law.

Tortious interference with contract has five elements; one is intentional interference. “Intentional interference” requires intentionality, interference, and impropriety. The intentionality issue hinged on several facts, including the receipt of the Notice Letter, the filing of the UCC-1 Financing Statement, and the information known to Defendant through the application process.  Next, purposeful conduct, however subtle, may be enough to constitute inducement. Furthermore, if a fact-finder determined that Defendant interfered with the contract, this determination may suffice to show that the interference was improper. Thus, these issues were matters of fact rather than of law. 

As for damages, Plaintiff claimed that Defendant’s funding caused the Practice to breach its loan agreement because it was unable to sustain the volume of debits. Defendant argued that its infusion of funds actually allowed the Practice to make some repayments to Plaintiff. Both positions had support in the record; thus, summary judgement was inappropriate. 

As for the UCC claim, Section 9-625(b) states that a “transferee of funds from a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party.” Defendant is a transferee of the collateral shared with Plaintiff. Its rights to the collateral depend on whether it colluded with the practice. A comment to another UCC section defines the term “collusion” to include a scenario where one party knows that the other’s conduct constitutes a breach and gives substantial assistance or encouragement to the other. This is a question for the fact-finder. 

The opinion is available in PDF here.

Monday, October 9, 2017

Bainbridge St. Elmo Apts v. White Flint Express Realty (Ct. of Special Appeals)

Filed: July 18, 2017

Opinion By: Raker

Holding: Bainbridge was liable for White Flint's attorney's fees under an express attorney fees shifting provision found in the indemnification agreement between the parties.

Facts: The case involves a written easement agreement between the parties that permitted Bainbridge St. Elmo Apartments ("Bainbridge") access to White Flint Express Realty's ("White Flint") property for a construction project of a 17 story high rise building immediately adjacent to White Flint's property in Bethesda, Maryland.  Bainbridge promised in the agreement to perform in a professional manner and would not use a pile-drive system to secure the hole for the foundation of the apartment building.  In exchange, Bainbridge received the right of access to the White Flint property, including air rights for a crane, as a part of the construction.

Article 9 of the agreement provided that "[t]he prevailing party in any arbitration shall be awarded reasonable counsel fees, expert and non-expert witness costs and expenses and all other costs and costs and expenses reasonably incurred, directly or indirectly, in connection with said arbitration, and all costs and fees of such arbitration shall be borne exclusively by the non-prevailing party.”  Article 19 provided the following indemnification language: "Bainbridge hereby indemnifies, and agrees to defend and hold harmless White Flint . . . from any and all claims, demands, debts, actions, causes of action, suits, obligations, losses, costs, expenses, fees, and liabilities (including reasonable attorney’s fees, disbursements, and litigation costs) arising from or in connection with Bainbridge’s breach of any terms of this Agreement or injuries to persons or property resulting from the Work, or the activities of Bainbridge or its employees, agents, contractors, or affiliates conducted on or about the White Flint Property, including without limitation, for any rent loss directly attributable to any damage to the White Flint Property caused by the construction of the Project, however Bainbridge shall not be liable for matters resulting from the negligence or intentional misconduct of White Flint, its agents, employees, or contractors. The indemnification obligations set forth herein shall survive the termination of this Agreement indefinitely.”

During construction, damaged occurred to the buildings on White Flint's property, resulting in a stop work order from Montgomery County, leading to White Flint terminating the agreement for material breach by Bainbridge.  Subsequently, White Flint filed an action against Bainbridge, resulting in the grant of a motion for summary by the trial court, finding: "that Bainbridge’s obligations survived the termination, that Bainbridge materially breached the agreement ... [and] under Article 19 of the Agreement, White Flint was entitled to attorney’s fees."  After a hearing, the trial court then entered an order awarding a total of $3,931,648.47 in attorney's fees and costs to White Flint.  Bainbridge appealed the fee order.


Analysis: The Court of Appeals analyzed the dispute over first-party attorney fee shifting by using traditional contract interpretation principles, including interpreting language in a contract based on its customary meaning, and looking at the entire agreement for context of a disputed provision. Under Maryland law, the American Rule for attorney fee shifting means that each party typically bears its own attorney's fees in a lawsuit, absent an applicable exception to that rule.  One such exception - where the parties have agreed to a fee shifting provision - is at issue in the present litigation.  Under the American Rule, typically an agreement to indemnify a party may include a fee shifting provision, but that Rule distinguishes between first and third party attorney's fees.  The former - where a party expends attorney's fees to determine the existence of an indemnification obligation - is distinguished from the latter - where a party expends attorney's fees to defend itself from a third party claim which was the obligation of the other party to defend.  Generally, first party attorney's fees are not recoverable under the American Rule in indemnification clauses where third party attorney's fees are recoverable in such clauses.

The Court then explains that the Nova Research v. Penske, 405 Md. 435 (2008), case required that first party fee shifting provisions must be express and strictly construed in indemnity agreements to be enforceable, using traditional contract interpretation principles.  The Court goes on to distinguish Nova Research from the present case, as Article 19 of the agreement here expressly provided for recovery of attorney's fees as a part of the indemnification obligations of Bainbridge to White Flint.  The Court then construed Article 19 by examining the purpose of the agreement - to make sure White Flint was made whole in the event that Bainbridge caused damage during construction - and then by examining the specific language in the indemnification provision itself.  The Court held that the clause involved three different clauses of indemnification, and that each clause was read independently.  Only the latter two of these clauses involved defense of third-party claims by Bainbridge, meaning that Bainbridge was still obliged "to defend and hold harmless White Flint" in the event that Bainbridge breached the agreement.  This first clause contained an express provision to shift attorney's fees.

The Court's view was that the indemnity agreement between the parties.  "Bainbridge and White Flint designed the agreement to ensure that Bainbridge, and not White Flint, carried all of the risk from the construction work; otherwise, White Flint had no incentive to support Bainbridge’s plans. Thus, the parties designed Article 19 to ensure that White Flint would be made whole if Bainbridge breached the agreement, which supports first-party fee shifting."

As a result, the Court affirmed the Court of Special Appeals and the trial court's order, directing Bainbridge to pay White Flint's attorney's fees incurred in the litigation.

The full opinion is available in PDF.

Friday, September 22, 2017

Deutsch v. G&D Furniture Holdings (Ct. of Special Appeals, Unreported)

Filed: August 28, 2017

Opinion by: Judge Nazarian

Holding:

A business owner’s requests for inspection of financial books and records relating to the management of a corporation and for the appointment of a receiver fall within the arbitration provision in a Stockholders Agreement that set forth comprehensive agreements involving many businesses and 55 investors.

Facts:

Plaintiff and Defendant jointly owned many retail furniture businesses.  In 2006, the parties executed a Stockholders Agreement, which replaced a 1990 agreement.  The Stockholders Agreement set forth comprehensive agreements regarding the ownership of the companies, transferability of corporate shares, management of the companies, composition of the board of directors, division of profits, payment of dividends, maintenance of life insurance policies on stockholders, as well as providing for mediation and arbitration “in the event that there is any dispute between the parties regarding this Agreement.”

As the businesses encountered setbacks, the parties held different views about the operation and management of the business, financial decisions, the creation of other entities to which business assets allegedly were transferred, and decisions to wind down the original businesses.  The disputes between the parties ultimately led to litigation.  The Court of Special Appeals affirmed the Circuit Court for Anne Arundel Court’s decision that the Stockholders Agreement’s arbitration clause should be read broadly to include the requests for a receiver and to inspect the books.

Analysis:

The Maryland Uniform Arbitration Act “embodies a ‘legislative policy’ in favor of the enforcement of agreement[s] to arbitrate.”  Harris v. Bridgford, 153 Md. App. 193, 201 (2003) (quoting Allstate Ins. Co. v. Stinebaugh, 374 Md. 631, 641 (2003)).  Although arbitration is favored, the contract language and intent of the parties must be respected.   “Where there is a broad arbitration clause calling for the arbitration of any and all disputes arising out of the contract, all issues are arbitrable unless expressly and specifically excluded.”  Gold Coast Mall, Inc. v. Larmar Corp., 298 Md. 96, 104 (1983).

Combined with the policy to read arbitration clauses broadly (The Redemptorists v. Coulthard Servs. Inc., 145 Md. App. 116, 149 (2002) (citing NSC Contractors, Inc. v. Borders, 317 Md. 394, 403 (1989)), the Court held the arbitration clause’s “regarding this Agreement” language indicated that the parties intended to require alternative resolution of everything they disputed.

The Court also held that the Defendants did not waive their right to compel arbitration of the claims in the counterclaim merely by filing pleadings in this litigation (their pleadings requested the court compel arbitration).

This is an unreported opinion.  See Md. Rule 1-104.

The full opinion is available PDF.

Thursday, August 31, 2017

Ceccone v. Carroll Home Servs. (Ct. of Appeals)

Filed: July 28, 2017

Opinion by: Judge Robert N. McDonald

Holding: Under Maryland law, contractual provisions which purport to shorten the statutorily-prescribed period of time within which a civil action must be brought are enforceable only if (1) there is no statute to the contrary; (2) the provision is not the product of fraud, duress, misrepresentation, or the like; and (3) the provision is reasonable in light of all the circumstances.

Facts: Homeowners brought suit against a provider of maintenance services in connection with damages allegedly arising from improper maintenance of their home furnace.  The Defendant moved to dismiss the action based on a provision of a maintenance agreement entered into by the homeowners which provided that all claims of the homeowners against the Defendant, whether in contract or tort, were subject to a one-year limitations period.  The action, having been brought more than one year after the homeowners were on notice of a potential claim against the Defendant, was dismissed.    

Analysis:  The Court of Appeals reviewed the factors to consider in determining whether the contractual provision in question was reasonable.  The Court of Appeals provided that the circuit court should consider the totality of the circumstances, including, for example, the length of the shortened limitations period, its relation to the statutory period, the relative bargaining power of the parties, the subject matter of the contract, whether the shortened limitations period applies only to claims brought by one of the parties or runs in both directions, and other facets of the limitations provision—e.g., it appears to apply equally to claims of negligence and intentional torts.  Here, the Court of Appeals noted circumstances to suggest that the Defendant had greater bargaining power.

The Court of Appeals reversed the dismissal and remanded the matter to the Circuit Court to consider whether there was any misrepresentation or fraud which undermines the validity of the shortened limitations period provided in the maintenance agreement and to determine expressly whether the shortened limitations period is reasonable.

The full opinion is available in PDF.

Thursday, August 24, 2017

Open Text Communication v. Steven Grimes (D. Md. 2017)

Opinion by Judge Richard Bennett

Holding: A contracting party may unilaterally waive a provision of a contract that was placed in the contract for its’ own benefit.

Facts: Plaintiff brought suit against its former employee and his new employer Defendant for violations of the federal Defend Trade Secrets Act, the Maryland Uniform Trade Secrets Act and several common law causes of action. It was alleged that before Grimes departed from his high level executive position at Plaintiff, he stole confidential and proprietary customer data from an internal database and used that data in his new position at the Defendant’s company in order to solicit Plaintiff’s clients. The Defendants were also alleged to have stolen employee’s from Plaintiff. This violated various “non-compete” clauses in the employment contracts for all of the former Plaintiff employees involved in the exodus. Defendant is a direct competitor of Plaintiff.

The Defendant’s argued in a Motion to Dismiss that Plaintiff was bound to a forum selection clause which was listed in the “Employee Confidentiality, Non-Solicitation, and Invention Assignment Agreement, that each employee involved in this matter signed. Plaintiff, is a Canadian company, had delineated in its’ contracts that disputes between the company and employee’s and former employee’s would be handled in Canadian courts. The causes of action alleged in the Plaintiffs complaint however, took place in Maryland. The Defendant employee, the alleged mastermind of the plot, worked out of his home in Clarksville, Maryland. The agreement primarily was put in place to prevent employee’s from sharing confidential company information. The Defendant employee signed the agreement which stated specifically that he would “keep confidential and hold in secrecy” all of Plaintiffs confidential information for a period of three years following the end of his employment. He was also prohibited from publishing or sharing the information, and soliciting employee’s to leave Plaintiff for a period of six months following his termination.

Analysis:

The basis of the Motion to Dismiss was focused on an improper forum argument formum non conveniens and referenced the forum selection clause listed below;

“This  agreement  and  all  the  rights  and  obligations  arising  herefrom  shall  be  interpreted  and  applied  in  accordance  with  the  laws  of  the  Province  of  Ontario and in the courts of the Province of Ontario there shall be exclusive jurisdiction  to  determine  all  disputes  relating  to  this  Agreement  and  all  the  rights  and  obligations  created  thereby.  I  hereby  irrevocably  attorn to  the  jurisdiction of the courts of the Province of Ontario.”

On this aspect of the matter, the Court found that the Defendant had failed to prove that a Canadian court would reach a different result than it would adjudicating the case on the facts. The Defendant argued that the since the clause only benefited the Plaintiff, the Plaintiff should be bound to it and not allowed to continue with the case in Maryland. The Court did not agree.

 The Court notes that regardless of whether the Defendant agreed to “irrevocably attorn to the jurisdiction  of  the  courts  of  the  Province  of  Ontario, that alone, “did  not  foreclose Plaintiffs ability to  file  suit  in  Defendant Employee home  state.  The Court then provided that “[I]t  is  well  settled  that  a  contracting  party  may unilaterally waive a provision of the contract...which has been placed in the contract for that party’s  benefit.” 132 S.W.3d 302, 307 (Mo. Ct. App. 2004); JetBlue Airways Corp. v. Stephenson, 88 A.D.3d 567, 574, 931 N.Y.S.2d 284, 289 (2011).

The Court went on to draw a distinction referencing the nature of the agreement that was the subject of the lawsuit versus that of an agreement drafted to obligate “each party” to a particular jurisdiction. The wrongful acts were alleged to occur in Maryland, so the filing of lawsuit where the defendant resided was deemed to be the proper forum.  The Motion to Dismiss based on forum non conveniens was denied.

The Motion also argued that eight of the ten counts alleged in the complaint were outside of the scope of the Clause because the usage of the Plaintiffs files was not related to the Defendants employment.

The Court decided that: “In sum, while all ten counts in the Complaint shall survive Defendants’ Motion based on Plaintiffs waiver of the forum selection clause in the Agreement, this Court notes that even if the forum selection clause were not waived, eight of the ten counts would still proceed to discovery.”

The opinion is available in PDF.  


Tuesday, August 8, 2017

Schneider Electric Buildings Critical Systems v. Western Surety (Ct. of Appeals)

Filed: July 28, 2017

Opinion by: Judge Adkins

Holding:

A surety company that guarantees performance of a construction subcontract with a performance bond is not bound by the subcontract’s mandatory arbitration clause when the subcontract is incorporated by reference into the bond and the clause refers only to the subcontract’s parties and the bond allows for dispute resolution in court.

Facts:

In May 2009, Plaintiff, a construction contractor, signed a Master Subcontract Agreement (“MSA”) with NCS, an electrical subcontractor, to cover future projects.  The MSA included a mandatory arbitration clause (the “Clause”).  In October 2009, Plaintiff was hired by another construction contractor to help build a medical research facility.  Plaintiff in turn hired NCS to help with the project.  Plaintiff and NCS signed a subcontract (“NCS Subcontract”) that incorporated the MSA by reference.  The NCS Subcontract required NCS to furnish a performance bond (“Bond”), which it obtained from Defendant.  The Bond made NCS and Defendant jointly and severally liable to Plaintiff for performance of the NCS Subcontract.

During construction, a dispute arose, NCS abandoned the site and Plaintiff terminated the contract.  In February 2014, Plaintiff filed a demand for arbitration with NCS.  In April 2014, Plaintiff amended the demand to include Defendant.  Defendant filed a petition in Howard County Circuit Court in which it requested a declaratory judgment that it was not bound by the Clause.

The case was transferred to a more proper venue, Harford County Circuit Court, which granted partial summary judgment for Defendant.  That court explained that the Bond is only insuring that Defendant is liable for any construction that has not been performed, and found no evidence of an intention that Defendant should be bound to dispute resolution provisions of the MSA.  

The Court of Special Appeals affirmed, holding that “the ‘joint and several’ obligation clause in the (Bond) does not evince (Defendant’s) assent to be bound by the (Clause) in the incorporated-by-reference chain of documents.”  Schneider Elec. Bldgs. Critical Sys., v. Western Sur. Co., 231 Md. App. 27, 46 (2016).  The Court of Appeals granted Plaintiff’s petition for a writ of certiorari.

Analysis:

The Court of Appeals applied Maryland contract law to determine if Defendant is bound by the Clause.  Precedent in Maryland requires courts to look at the intention of the parties as expressed in the language of the contracts.  The Court of Appeals explained in Hartford Accident & Indem. Co. v. Scarlett Harbor Assocs., 346 Md. 122, 127 (1997) that “arbitration is a process whereby parties voluntarily agree to substitute a private tribunal for the public tribunal otherwise available to them” and an arbitration clause “cannot impose obligations on persons who are not a party to it and do not agree to its terms.” 

The Court of Appeals interpreted the Bond by “constru(ing) (the Bond, NCS Subcontract, and MSA) as a whole…not (by) read(ing) each clause or provision (of each contract) separately.”  Owens-Illinois v. Cook, 386 Md. 468, 497 (2005).

Here, the Court of Appeals agreed with the lower courts because the Clause refers to the “parties” to the NCS Subcontract (which are Plaintiff and NCS) and the Bond permits court actions to resolve disputes between NCS and Defendant.  Since Defendant was not a “party” to the NCS Subcontract, the Clause does not apply to Defendant.  The Court of Appeals found support in its holding in Liberty Mutual Insurance v. Mandaree Public School District #36, 503 F.3d 709 (8th Cir. 2007), whose facts are similar to this case.

The full opinion is available PDF.

Tuesday, August 1, 2017

Hanover Investments, Inc. v. Volkman (Ct. of Appeals)

Filed: July 31, 2017

Opinion: Judge McDonald

Holding: A declaratory judgment action should be stayed or dismissed while a separate action is pending in another state that involves the same parties and that raises essentially the same issues presented in the declaratory judgment action in Maryland. The fact that the Maryland court had previously dismissed an earlier related action did not create “unusual and compelling circumstances” that would justify an exception to the principle that a court should not entertain a declaratory judgment action when there is a pending lawsuit in another state involving the same issues.

Facts: Volkman was subject to two agreements with Hanover, a Maryland corporation [or related companies], an employment agreement dated January 1, 1993, and a separate shareholder agreement entered into in 2007. The genesis of the lawsuit was Ms. Volkman’s termination in 2010. The legal proceedings related to the matter can be divided into four actions: (i) an employment agreement action; (ii) an arbitration proceeding; (iii) a shareholders' agreement action; and (iv) a declaratory judgment action (which is the subject of this opinion).

The employment agreement action - More than two years after her termination, on April 17, 2012, Volkman filed a lawsuit based on the employment agreement. On March 22, 2013, after the court dismissed several of her tort claims, Volkman voluntarily dismissed the employment agreement action with prejudice by stipulation of counsel pursuant to Maryland Rule 2- 506(a).

The arbitration proceeding - On October 10, 2012, while the employment agreement action was pending, Hanover invoked the arbitration provision in the shareholders’ agreement to determine what it was required to pay Volkman when it redeemed her stock. On August 1, 2014, Hanover successfully obtained a default judgment in Montgomery County Circut Court confirming the award. Ms. Volkman did not appeal that judgment.

The shareholders' agreement action - On December 17, 2012, Volkman served Hanover with a complaint that she filed in a state trial court in Minnesota which named Hanover as the lone defendant, alleging that it had violated its contract with her and sought  specific performance – the return of her Hanover stock – a remedy explicitly provided for in the shareholders’ agreement. Hanover moved to dismiss the complaint, asserting that the Minnesota court lacked
in personam jurisdiction of Hanover, but the Minnesota Court of Appeals affirmed the trial court decision. Contemporaneously with its defense in the shareholders' agreement action, Hanover filed a declaratory judgment action in Maryland (discussed below) involving the same issues and Hanover prevailed in the Circuit Court with Volkman appealing that decision. As a result, on January 19, 2015, the Minnesota trial court dismissed Volkman's shareholders’ agreement action, but explicitly reserved
jurisdiction to reopen the case depending on the resolution of the Maryland appeal.

The declaratory judgment action - On June 26, 2013 – two months after the Minnesota trial court denied Hanover’s motion to dismiss, and while that decision was on appeal – Hanover filed a declaratory judgment action against Volkman in the Circuit Court for Montgomery County.  Volkman noted the pendency of the shareholders’ agreement action in Minnesota and asked the Circuit Court to either decline jurisdiction or stay the proceedings in the declaratory judgment action pending a final judgment in the shareholders' agreement action. The Circuit Court declined to do so, citing Marriott Corp. v. Village Realty & Inv. Corp., 58 Md. App. 145 (1984), for the proposition that a declaratory judgment action could be filed “defensively” even if there was similar litigation “pending or impending” in another court and rendered a decision in favor of Hanover. Volkman appealed to the Court of Special Appeals arguing that the Circuit Court should not have heard the case while the shareholders’ agreement action involving the same issues was pending and the Court of Special Appeals held that the Circuit Court erred in issuing a declaratory judgment while the shareholders’ agreement action was pending. 225 Md. App. 602 (2015). Hanover petitioned the Court of Appeals for a writ of certiorari, which it granted.

Analysis: Pertinent to this case, a court should not entertain a declaratory judgment action when there is already a pending action “involving the same parties and in which the identical issues that are involved in the declaratory action may be adjudicated.” Sprenger v. Public Service Comm’n, 400 Md. 1, at 27-28 (2007). The court reasoned that in this case, the shareholders’ agreement action qualifies as an earlier-filed, pending action that would, under customary analysis, operate as a bar to the later-filed declaratory judgment action. The court further reasoned that the two actions involve essentially the same parties and both actions concern the identical issue – the propriety of Hanover’s redemption of Volkman’s Hanover stock under the shareholders’ agreement.

Accordingly, the Court of Appeals affirmed the Court of Special Appeals' decision.

The full opinion is available in pdf.

Monday, July 31, 2017

Curtis Cox v. SNAP, Inc. (4th Circuit)


Filed: June 13, 2017

Opinion by: Diana Gribbon Motz, Circuit Judge

Holding:

            When reviewing a contract providing for a non-qualified stock option to purchase shares of common stock, Defendant corporation's argument that the contract only promised to issue options in the future was without merit because the prevention doctrine provides, "if a promisor prevents or hinders fulfillment of a condition to his performance, the condition may be waived or excused." Consequently, the fourth circuit court of appeals affirmed the district court, holding Defendant corporation liable for breach of contract, awarding Plaintiff damages in the amount of $637,867.42.

Facts:

             “In 2006, SNAP, a Virginia corporation, sought to expand its business in the field of federal procurement by contracting with Curtis Cox, a Maryland resident and the president of C2 Technologies, an established government contracting firm. On January 12, 2006, the parties executed a memorandum of understanding in which Cox agreed ‘to promote and market [SNAP] in exchange for obtaining an equity stake’ in the company.” There was no dispute that the memorandum constituted a binding contract.

            Under the terms of the contract, Cox and C2 Technologies agreed to provide various forms of assistance to SNAP, including using their best efforts to help SNAP obtain specific contracts, to consider SNAP for any potential leads, and to provide SNAP with approximately $240,000 worth of marketing support and assistance.

            “In return, the contract provides that ‘on January 12, 2006,’ the same day the parties executed the contract, SNAP ‘will issue a non-qualified stock option to Mr. Cox granting him the right to purchase 308 shares, representing five (5%) percent of the total authorized shares of stock of [SNAP].’ The contract announces SNAP’s intention to execute a stock split, under which Cox’s options at any time after January 1, 2008 and gives Cox the right to require SNAP to repurchase his options – a “put option” – any time after January 1, 2011. The repurchase price is payable to Cox ‘over a five-year period with interest at the then current prime rate.’”

            “Cox attempted to exercise his put option on March 18, 2011 in a letter to SNAP President Navneet Gupta. The parties discussed but never came to a resolution regarding Cox’s request. On October 6, 2015, Cox sent Gupta a second letter demanding that SNAP pay him the full value of his options. On October 9, 2015, Gupta replied that ‘[SNAP] owed you nothing.’”

            “A month later, in November 2015, Cox filed suit for breach of contract against SNAP in Virginia state court. SNAP removed the case to the district court for the Eastern District of Virginia. After removal, Cox filed an amended complaint alleging breach of contract for failure to repurchase, breach of contract for failure to issue his options, and quantum meruit.”

            In August 2016, the parties filed cross-motions for summary judgment. The district court granted Plaintiff summary judgment, reasoning, “the plain language of the contract showed that SNAP issued the stock options to Cox and that the contract did not require any further steps as a condition precedent before those options issued. In the alternative, the court held that the language at issue was patently ambiguous and must therefore be construed against SNAP. Applying the contract’s formula for calculating the value of Cox’s options and interest owed, the court awarded cox a total of $637,867.42.” Defendant appealed.
           

Analysis:

(1)  Liability and breach of contract

The court held Defendant liable because as the contract conveyed the stock options to Plaintiff, and Defendant breached the contract by refusing to repurchase them when Plaintiff exercised his put option. Defendant argued that the contract did not actually convey stock options to Plaintiff, rather, the contract merely promised to issue stock options in the future, and therefore the issuance of stock options was a condition precedent to Defendant’s obligation to repurchase them.

The court found this defense without merit, calling the defense a “self-defeating position.” The court explains, “even if issuing the stock options was a condition precedent to [Defendant]’s obligation to repurchase, [Defendant] has excused that condition by breaching its promise to issue the options, and so the prevention doctrine dooms its case. Under the prevention doctrine, ‘if a promisor prevents or hinders fulfillment of a condition to his performance, the condition may be waived or excused…For the prevention doctrine to apply, [Plaintiff] need only show that [Defendant] materially contributed to the non-occurrence of the condition.”

The court further bolsters its analysis with Supreme Court of Virginia case law (Parish v. Wightman), which held, “where a contract is performable on the occurrence of a future event there is an implied agreement that the promisor will place no obstacle in the way of the happening of such even, particularly where it is dependent in whole or in part on his own act; and, where he prevents the fulfillment of a condition precedent or its performance by the adverse party, he cannot rely on such condition to defeat his liability.” The court further noted the failure to act can be considered, “contributing to the non-occurrence of the condition.”

Here, “[Defendant] controlled whether the stock options issued, and, even under its own interpretation, it had a contractual obligation to issue those options. By refusing to do so, [Defendant] plainly forfeited its right to rely on their issuance as an unfulfilled condition precedent to its obligation to repurchase [Plaintiff’s] options.”

Finally, the court referred to the Restatement, which reiterates that “when a condition in a contract fails to occur solely because a party breached one of its other obligations in the very same contract, there is no doubt that the party caused the non-occurrence for the purposes of the prevention doctrine.”

Holding that Defendant cannot avoid liability, the court affirmed the district court, explaining, “there is no doubt that [Defendant] had an obligation to bring about the condition it now tries to hide behind.”

(2)  Calculating Damages

Finding that the district court’s natural reading of the contractual language was appropriate, the court affirmed the district court’s holding, awarding Plaintiff a total of $637,867.42. The contract stipulated a formula for calculating the repurchase price of Plaintiff’s options:

“The price shall be determined based on the excess of the then fair market value of [SNAP], with such value determined based on .8 times [SNAP’s] annual sales during the most recently preceding twelve-month period, over the initial strike price…For purposes of determining the strike price of the options issued pursuant to paragraph 1, the value of [SNAP] will be based on a valuation of .8 times [SNAP’s] sales in calendar year 2005. This amount is estimated to be approximately $12,000,000.” [Amount payable] over a five-year period with interest at the then current prime rate [3.25%].
           
            The parties agreed that the value of Plaintiff’s options may be expressed as: ((80% of Defendant’s 2010 sales) – (80% of Defendant’s 2005 sales)) x 0.05. The district court found Defendant’s 2010 sales were $18,365,265 and that its 2005 sales were $4,938,584. Applying the above formula, the court found that Plaintiff’s options were worth $537,067.25. Defendant concedes that the district court used the proper formula to calculate damages, but it contends that the district court erred when it found that Defendant’s 2005 sales were $4,938,584. Specifically, Defendant relies on its contractual language, contending that its actual sales are immaterial because the contract stipulates that the 2005 sales were an estimated $12,000,000. The court disagreed.

The court found Defendant’s argument without merit, and instead held, “the contract provides that the value of [Plaintiff’s] options depends on the growth in [Defendant’s] value from 2005 to the time that [Plaintiff] finally exercises his put option. Under these circumstances, it stands to reason that the parties would have established a rough benchmark against which they could track the value of [Plaintiff’s] options.”

The court provided three reasons why Defendant’s logic was flawed. First, “the ordinary meaning of ‘estimate’ connotes a ‘rough or approximate calculation,’ not a fixed assumption. Common sense recommends we adhere to this meaning, since the parties estimated that the amount described is ‘approximately’ $12,000,000.” Second, the court argued, “it is not clear whether ‘this amount’ refers to [Defendant’s] 2005 sales or an estimate of the initial strike price, that is, 80% of [Defendant’s] sales. This unresolved ambiguity suggested that the parties did not mean for the estimate to serve as a stipulation.” Finally, the court argued, “[Defendant’s] reading would leave the parties and the court no way to establish a concrete strike price, and therefore no way to determine the value of [Plaintiff’s] options…for the purposes of establishing a strike price, it would be exceedingly strange for the parties to stipulate to an indeterminate figure."

In conclusion, the court found that “sales in calendar year 2005” referred to Defendant’s actual sales in 2005, and affirmed the district court’s award to Plaintiff of $637,867.42.

The full opinion is available in PDF.