Clark Office Building, LLC v. MCM Capital Partners, LLLP, et al. (Ct. of Special Appeals))

Filed: January 29, 2021.

Opinion: Deborah S. Eyler

Holdings:

(1)  Landlord cannot maintain unjust enrichment claim against an unauthorized occupant of the leased premises because landlord did not confer a benefit on the occupant, a required by Maryland law, and the occupant was not unjustly enriched where landlord had a valid contract claim against the tenant for rent during time occupant possessed the premises.

(2) Landlord could not recover against unauthorized occupants of premises because occupants either had oral subcontract with tenant or were trespassers and were thus not in privity with landlord.

Facts:

Clark Office Building, LLC (“Landlord”) leased office space to MCM Capital Partners, LLLP (“Tenant”) for a term of five years, from February 1, 2015 through January 31, 2020. Beginning on January 1, 2018, Tenant failed to pay its monthly rent under the Lease. Landlord did not immediately issue a notice of default to Tenant due to assurances from Tenant that it was working on paying rent.

Without Landlord’s knowledge, and in violation of lease provisions, Tenant allowed MCM Capital, LLC and Alta Realty Company, LLC (“Occupants”) to occupy a portion of the premises rent free. Occupants were in possession of a portion of the premises from January to March of 2018. Around March 23, 2018, Landlord discovered Occupants and contacted Tenant who notified Landlord that it was surrendering the premises.

Landlord sued Tenant for breach of contract to recover unpaid rent and obtained a judgment for unpaid rent from January 2018 through January 2019. Landlord also sued Occupants for unjust enrichment for the value of rent for January to March of 2018. The Circuit Court ruled that Landlord could not recover restitution for Occupant’s use of the premises because the lease between Landlord and Tenant covered the same subject matter. The Circuit Court further ruled that, even if that were not so, Occupants were subtenants and were not in privity with Landlord; therefore, they could not be liable to Clarke for damage for their use and occupancy of the premises. 

Analysis:

The Court of Special Appeals held that the Landlord could not seek restitution from the Occupants because Landlord’s contract with Tenants, on which judgment had already been obtained, covered the same subject as the unjust enrichment claim against Occupants and, additionally, that there was no privity between Landlord and Occupants to justify recovery of unpaid rent.

The bulk of the Court’s analysis focused on when a stranger to a contract who receives a benefit from a party’s performance on a contract with a third party may be liable for unjust enrichment to the extent of the benefit retained.  To prevail on an unjust enrichment claim, the plaintiff must show: (1) a benefit conferred upon the defendant by the plaintiff; (2) an appreciation or knowledge by the defendant of the benefit; and (3) the acceptance or retention by the defendant of the benefit under such circumstances as to make it inequitable for the defendant to retain the benefit without payment of its value.

The Court noted that it is “settled law in Maryland, and elsewhere, that a claim for unjust enrichment may not be brought where the subject matter of the claim is covered by an express contract between the parties.” Thus, even if the elements of unjust enrichment are met, a party is not liable for unjust enrichment where a contract covers the subject matter of the claim. While this statement is generally true, the court explained that it is an overly broad statement of the law. The Court held that this bar on an unjust enrichment claim only exists where the party to the contract is not prevented from recovering against the other party to the contract. Where there is nothing preventing such recovery, it would not be unjust for the stranger to retain the benefit without payment.

The Court found that the Landlord could not establish a claim for unjust enrichment because it did not confer a benefit onto the occupant. The landlord had already transferred the right of occupancy to the Tenant, and therefore Landlord could not have transferred any rights of possession to the Occupant. Indeed, only the Tenant can transfer the right of occupancy during the term of the lease, subject, of course, to the lease provisions. The Landlord did not exercise its right to possess the premises until after the Occupants had moved into, and subsequently vacated, the premises. As a result, the Landlord did not have the ability to confer the benefit of possession onto the Occupants because the Tenant had the sole right under the lease to possess the premises.

Even if the elements of unjust enrichment were met, the Landlord was nevertheless prevented from recovering because the evidence showed that the Occupants’ retention of the benefit was not unjust. As noted above, where valid contract covers the subject of a claim, a claim for restitution cannot stand. This remains true even where a benefit is conferred on a stranger to the actual contract. This rule, however, is contingent on the contracting party not being prevented from recovering against the other party to the contract, as noted above.

By way of example, the Court discussed Raymond, Colesar, Glaspy & Huss, P.C. v. Allied Capital Corp, 961 F.2d 486 (4^th Cir. 1992) (applying Virginia law). There, the defendant, an investment capital company, asked plaintiff to audit a company that defendant was looking to invest in, a company named CAR. CAR contracted with plaintiff to obtain the audit but went bankrupt prior to completion of the audit. The plaintiff sued defendant on a quasi-contract theory for payment for its services rendered to CAR. The Raymond court affirmed a judgment against the defendant and awarded plaintiff the cost of services rendered to CAR as damages.

The Court in this case viewed the Raymond decision as a prime example of where the original party to the contract was prevented from obtaining judgement against the other party to the contract – i.e. due to bankruptcy. The Court stated that where the insolvency of the original contracting party or some other statute prevents recovery, an unjust enrichment claim may be maintained against the stranger to a contract. The facts of this case, however, showed no such impediment. Indeed, the Landlord had already recovered against the Tenant for unpaid rent for the months the Occupants possessed the premises. In such a case, the retention of a benefit by the Occupant was not unjust, thus preventing the unjust enrichment claim.

Finally, the court affirmed the trial court’s alternative ruling that the landlord could not recover because it was not in privity with Occupants. The evidence showed that the Tenant and Occupants entered into an oral contract to sublease the property. Under Maryland Law, a sublessee is not in privity of estate or contract with the original lessor, and thus, there was no legal relationship between the Landlord and the Occupants to form a basis of recovery.

The full opinion is available in PDF

Impac Mortgage Holdings, Inc. v. Curtis J. Timm, et al. (Court of Appeals)

Filed: July 15, 2021

Opinion by: Judge J. McDonald

Holding:  The Court of Appeals held that a publicly-held Maryland corporation’s charter contained an ambiguous provision regarding a series of preferred stock.  The ambiguity was resolved by the contemporaneous and undisputed documentation of the corporation without resorting to construing the provision against the drafter, which, in any event, was the corporation. 

Facts:  Impac Mortgage Holdings, Inc. decided to raise capital by issuing a series of preferred stock, Series B.  A provision of Impac’s charter prohibited Impac from adversely changing the special rights and preferences of Series B stock without the approval of two-third of Series B shares.  Impac later issued a nearly identical series of preferred stock, Series C.  In 2009, Impac sought to buy back shares of both Series B and Series C at a severe discount and eliminate the special rights and privileges associated with those shares.  Owners of two-thirds of Series B and Series C, tallied together, approved the measure, however owners of less than two-thirds of Series B did so.  Impac believed that approval of two-thirds of the Series B and Series C shares tallied together, provided the requisite approval to buy back shares and eliminate the special rights and privileges associated with those shares.  Owners of Series B filed an action in the Circuit Court for Baltimore City seeking to restore the rights and preferences of Series B shares.  The Circuit Court found that the charter provision was ambiguous and that the extrinsic evidence and interpretive aids referenced did not resolve the ambiguity.  The charter provision was construed against the drafter, Impac.  On appeal, the Court of Specials Appeals found that the charter provision was unambiguous, but reached the same result. 

Analysis:  The Court of Appeals construed the charter provision under the “objective” approach to contract interpretation by reviewing the language within the four corners of the contract and assessing whether the charter provision is ambiguous.  The Court of Appeals agreed with the Circuit Court that the charter provision when read as a whole, was ambiguous.  Specifically, the first charter provision specifies that Series B shareholders must approve a proposed charter amendment by a two-thirds vote and implies that only the votes of Series B shares matter.  However, the charter provision also contained a parenthetical that introduced the idea of voting separately as a class with holders of other series of preferred stock which at the time included Series B and Series C stock.  Due to the ambiguity, the Court of Appeals could consider extrinsic evidence to illuminate the mutual intent of the parties.  The Court of Appeals also emphasized that the purchasers of the stock were not a party to the drafting of the charter, and thus “the reasonable expectations of the purchaser of the securities must be given effect.” Kaiser Aluminum Corp. v. Matheson, 681 A.2d 392, 395 (Del. 1996).  The Court of Appeals considered the Series B prospectus summary and the Impac April 2004 board resolution as material extrinsic evidence.  The Series B prospectus summary contained only one interpretation, that Impac could not amend its charter in such a way as to materially and adversely affect certain Series B rights and preferences unless, Impact obtained the votes of two-thirds of the outstanding shares of Series B.  This interpretation was consistent with Impac’s board resolution which did not provide that the votes of any shareholder other than those of Series B stock could be included in the tally of votes on charter amendments affecting Series B preferences.  The Series B prospectus summary was the only material extrinsic fact that the reasonable investor would understand the charter provision to mean.  The Series B prospectus summary leads to only one interpretation of the charter provision, Impac could not amend its charter in such a way as to materially and adversely affect certain Series B rights and preferences unless Impac had obtained the votes of two-thirds of the outstanding shares of Series B.  The Court of Appeals did no resort to construing the charter provision against the drafter, Impac, as the documents resolved the ambiguity.  If the Court of Appeals were to conclude that the extrinsic evidence did not resolve the ambiguity and resorted to construing the provision against the drafter, the result would be the same.  Since fewer than two-thirds of the Series B shareholders consented to the buy back shares and eliminating the special rights and privileges associated with those shares, the amendments were not validly adopted. 

The full opinion is available in PDF.

Travelocity.com v. Comptroller of Maryland (Ct. of Appeals)

 

Filed: April 30, 2021

Opinion by: Judge Michele D. Hotten 

Holding: 

Online travel companies that facilitate hotel room or car rental reservations were not liable for Maryland sales and use tax prior to the 2015 amendment to Md. Code § 11-102(a) of the Tax-General Article; that amendment specifically added such companies to § 11-102(a)’s statutory definition of “vendors” liable for sales tax.

Facts: 

Petitioner (“Business”) operated an online travel company that facilitated web-based transactions between customers and third-party airlines, hotels, and rental car agencies.  Business entered into contracts with the third-party providers whereby it gained access to their reservation systems and subsequently listed the available flights, rooms, and vehicles on its internet portal.  In real-time, Business would connect interested customers’ selected reservations to the third-party providers; if a specific transaction matched an interested customer with an availability, the customer received the reservation, the third-party provider received the booking, and Business handled the communications, payments, and cancellations.  Business marked up the base rates charged by the third-party providers in return for the service it provided.

In November 2011, Respondent (“Comptroller”) assessed Business based on an audit of its 2003-2011 operations (the “audit period”) for the difference in tax rates between that ordinarily paid by Business and that paid by the third-party providers.  Comptroller issued a final determination in November 2012 which assessed Business over $6.4 million in taxes, fees, and interest.

In December 2012, Business appealed the tax assessment to the Maryland Tax Court, arguing that only a vendor of rooms, and vehicles was required to pay sales tax, and that as an online travel company it neither owned nor controlled the right to possess any of the rooms or vehicles that might give rise to sales tax liability.  Business further argued that the Maryland General Assembly’s 2015 amendment of the Tax Code to expand the definition of “vendor” to include “accommodations intermediaries” supported its position that it was excluded from the definition of “vendor,” and thus not subject to sales tax until 2015.  In December 2017, the Tax Court held Business liable for sales tax because Business was engaged in the business of a retail vendor, sold the right to occupy rooms or rent vehicles, and that the act of facilitating such reservations and rentals constituted sale of tangible personal property subject to sales tax.  However, the Tax Court found Business not negligent in failing to pay the tax during the audit period, to have made a good faith appeal, and to be entitled to enjoy a four-year statute of limitations, arriving at an adjusted assessment of $295,000.

Both parties petitioned for review in the Circuit Court for Anne Arundel County.  The Circuit Court in 2018 heard Comptroller’s appeal and affirmed the Tax Court’s decision.  The circuit court initially dismissed Business’s appeal for procedural errors, but in 2019 vacated the dismissal, heard the appeal, and affirmed the Tax Court’s decision.

In May 2019 Comptroller noted its appeal to the Court of Special Appeals, which stayed the appeal pending the circuit court’s decision on Business’s appeal.  In March 2020 the Court of Special Appeals lifted the stay and consolidated the appeals.  Prior to consideration by that court, Business petitioned and the Comptroller cross-petitioned to the Court of Appeals for certiorari, which the Court of Appeals granted.

Analysis: 

The Court initially noted that the Tax Court’s interpretations of tax law often necessarily involve mixed questions of fact and law entitled to a degree of deference and that it would use the same standard of review appropriate to administrative agencies’ factual findings: whether a reasoning mind could reasonably have reached the agency’s conclusion.  By contrast, the Tax Court’s purely legal conclusions would be afforded great weight, but would not bind the Court and would be considered de novo.

The Court continued its inquiry with statutory construction in order to construe § 11-102(a) (which imposes sales and use tax liability on “retail sale in the State; and a use, in the State, of tangible personal property or a taxable service”) as it existed during the audit period in question.  In order for Business to be liable, its conduct must have been both (1) “a sale or use” (2) “of tangible personal property”.  Finding hotel rooms and car rentals to clearly qualify as concerning tangible personal property or rights thereto, the Court turned to whether the transactions constituted a sale or use.

Evaluating relevant contract language of contracts spanning 2004 to 2010 between Business and its various third-party providers, the Court determined the contracts not to have transferred title or possession of the hotel rooms or rental cars to Business, but merely to have given Business the right to make those rooms and cars available to customers of its web portal and thereby broaden the distribution of the third-party providers’ products and services. Business did not purchase inventory nor accept any risk of loss of that inventory pursuant to the contracts.  The third-party providers remained owners & operators of their hotels and vehicles. Business merely facilitated transactions between customer and provider. In light of that analysis, the Court found Business’s transactions not to have constituted a sale or use under § 11-102(a), and not to be liable for sales tax in the audit period.

The Court similarly found Comptroller’s alternate argument unavailing: that Business should be liable for sales tax as an out-of-state or retail vendor under § 11-701(b) or (c). The Court’s earlier analysis finding Business not to have acquired title or possession of the tangible personal property meant Business could not possibly qualify as an 11-701(b) out-of-state vendor or 11-701(c) retail vendor because Business’s conduct did not meet the Tax Code’s definition of a sale.  Nor were the third-party providers acting as agents of Business within the State; each party acted according to contractually-agreed terms for mutual benefit.  Business facilitated the transaction but third-party providers ultimately delivered the rooms and vehicles.

The Court determined that, as it existed during the audit period, the sales and use statute (1) excluded online travel companies from the definition of vendor (2) left no debate about whether Business’s service concerned tangible personal property, but (3) left open whether an online travel company (such as Business) constituted a vendor that sold or delivered such tangible personal property.  In 2015, the Maryland General Assembly clarified that third item by expanding the statutory definition of vendors to specifically include “accommodations intermediaries,” or those other than an accommodations provider who facilitate the sale or use of an accommodation for a fee.  The Court found this subsequent clarification by the General Assembly in adding  “accommodations intermediary” to the statutory definition of vendor meant that an intermediary such as Business was not a vendor liable for sales tax prior to the amendment; to find otherwise would render the new language mere surplusage. As to any potential ambiguity in the statute before the 2015 amendment, the Court interpreted that ambiguity in Business’ favor to further conclude that Business was not liable for sales tax during the audit period.

Accordingly, the Court reversed, finding the circuit court to have erred in its decision affirming the Tax Court.

Three Judges noted their dissent and would have affirmed the Tax Court’s conclusion that Business was a “vendor” under the Tax Code as it existed during the audit period.

The full opinion is available in PDF.

7222 Ambassador Road, LLC v. National Center on Institutions and Alternatives, Inc. (Court of Appeals)

 

Filed: July 27, 2020

Opinion by: Judge J. McDonald

Holding:  The Court of Appeals held that a Maryland LLC that failed to file the required annual report pursuant to the Maryland Limited Liability Company Act § 4A-91l(c), thereby forfeiting the right to do business in Maryland, was precluded from continuing to prosecute an action in the Maryland courts.  The Maryland LLC’s appeal of a decision adverse to the LLC in the Circuit Court was dismissed because the appeal was not permitted by law. 

Facts:  The issue initially raised in this appeal concerns a discovery sanction imposed in a civil case.  Petitioner 7222 Ambassador Road, LLC failed to formally designate an expert witness by the deadline in the Baltimore County Circuit Court’s scheduling order.  Respondent National Center on Institutions and Alternatives, Inc (NCIA) filed a Motion in Limine that sought sanctions against Petitioner by limiting or excluding testimony of the witness.  The Circuit Court granted the Motion in Limine.  Petitioner as a result of the sanction had no case to present and the Circuit Court entered judgment in favor of Respondent.  Petitioner appealed the decision and the Court of Special Appeals affirmed the ruling.  Petitioner filed a petition for certiorari that was granted by the Court of Appeals.  After the Court of Special Appeals issued its opinion, but before the Petitioner filed its petition for certiorari with the Court of Appeals, Petitioner forfeited its right to do business in Maryland because it had failed to file the annual report.  The Petitioner further failed to reverse the forfeiture within the 60 day rectifying period.  Petitioner took no action to rectifying the delinquency until Respondent filed a motion to dismiss the appeal based on the forfeiture of Petitioner’s right to do business. 

Analysis:  The LLC Act permits a forfeited LLC to defend any action.  §4A-920.  Petitioner conceded they were not defending an action, rather initiating litigation.  Petitioner argued that forfeiture does not impair the “act” of the LLC.  §4A-920.  The Court of Appeals examined the legislative history and case law regarding forfeiture and the savings provision.  Any step taken in litigation would be an “act” that could be taken while being forfeited.  The Court of Appeals argued that if the statute were interpreted in such a way it would render wholly superfluous the savings provision that permits a forfeited LLC to “defend” litigation.  The Court of Appeals review of recent case law concluded that an LLC that has forfeited its right to do business may not pursue affirmative litigation, including an appeal, during the period of forfeiture citing to Price v. Upper Chesapeake Health Ventures, Inc., 192 Md. App. 695 (2010).  The Court of Appeals asserted that “the privileges associated with an LLC, such as tax benefits and liability protections, are afforded with the expectation that an LLC will fulfill its statutory obligations.”  Mayor and City Council of Baltimore v. Prime Realty Associates, LLC, 468 Md. 606, 623 (2020).  Petitioner forfeited its right to do business in Maryland including its ability to prosecute an appeal during the period of forfeiture.  The Court of Appeals concluded the appeal was not properly before the court and dismissed the appeal. 

The full opinion is available in PDF.

Bartenfelder v. Bartenfelder (Ct. of Special Appeals)

Filed: July 2, 2020 

Opinion by: Judge Steven B. Gould 

Holding: 

In the absence of a petition for dissolution, demand for appointment of a receiver does not trigger the statutory right, under §4-603(a) of the Corporations & Associations Article of the Maryland Code, to purchase the complainant’s stock in the subject company.

Facts: 

Appellant (“Aggrieved Shareholder”, or “Aggrieved”) and Appellee (“Continuing Shareholder”, or “Continuing”) were the sole shareholders in a two Maryland close corporations and one Maryland LLC (the “Businesses”).  In February 2017, Aggrieved Shareholder filed a complaint in the Circuit Court for Harford County against Continuing Shareholder and the Businesses, alleging malfeasance by Continuing and requesting (1) injunctive relief in the form of appointment of a receiver to prevent Continuing’s further alleged malfeasance and to conduct forensic accounting in order to detect past malfeasance, (2) an award of damages, expenses, attorney’s fees, and costs, and (3) declaratory relief in the form of a finding that certain of Aggrieved’s actions related to the Businesses were lawful.

Continuing Shareholder considered receipt of the complaint to have triggered his right under CA §4-603(a) to acquire Aggrieved Shareholder’s shares in the Businesses, answering with a request to stay dissolution in order to determine the fair value of Aggrieved’s interests, and enforce his election to purchase Aggrieved’s shares.

In January 2018, Aggrieved Shareholder amended her complaint to add breach of contract claims and other injunctive relief and damages. 

In April 2018 the Circuit Court for Harford County agreed that the statutory right had been triggered and ruled that appraisers be nominated and appointed, and proceedings stayed until the valuation process had concluded.  Aggrieved Shareholder filed motion for reconsideration which was denied, and then filed notice of appeal.

In June 2019, Aggrieved Shareholder filed for bankruptcy, resulting in automatic stay of all litigation.  That month, the appraisers determined Aggrieved’s interest in the two close corporations to be $560,000.  In November 2019, the circuit court granted Continuing Shareholder’s motion to confirm the appraisal and further ordered Continuing to pay to Aggrieved two installments of $280,000.  The court granted leave for Continuing to escrow the installments with the court, to be disbursed only on court order.  Aggrieved appealed in December 2019. The circuit court in February 2020 declared Continuing to have satisfied the payment obligations.

In May 2020, the Court of Special Appeals consolidated the two appeals.

Analysis: 

The first threshold issue before the Court was whether to dismiss the second appeal on grounds of mootness; whether the passage of the valuation process and satisfaction of Continuing Shareholder’s ensuing payment obligations had rendered the controversy moot due to the fact that Aggrieved Shareholder had filed for bankruptcy, making the proceeds subject to claims by creditors and therefore unavailable to repurchase the shares.  The bankruptcy court in September 2019 had lifted the stay of the instant litigation, but ordered enforcement of judgments against Aggrieved to remain stayed.  Because the funds Continuing Shareholder deposited with the circuit court remained there, subject to the stay and unavailable to Aggrieved, the Court found the second appeal not to be moot and denied its dismissal.

The second threshold issue before the Court was jurisdictional; because Aggrieved Shareholder’s initial and amended complaints had asserted claims related to the LLC but the circuit court’s orders had applied only to claims related to the close corporations, the decision had not adjudicated all claims, rights and liabilities of the parties to the action and had not resulted in a final judgment.  The Court noted, however, that statutory exceptions to the final judgment rule, enumerated in CJP §12-303 allowed for interlocutory appeal of orders “for the sale, conveyance, or delivery of…personal property or payment of money…”.  Because the circuit court’s second order compelled conveyance of Aggrieved’s personal property (shares in the close corporations) and payment of Continuing's money ($560,000), and its first order meritoriously intertwined with the second, the Court found both interlocutory orders to be properly reviewable on appeal.

The Court subsequently turned to the substantive issue on appeal, whether the purchase right under CA §4-603(a) had been triggered by Aggrieved Shareholder’s complaint for appointment of a receiver.  That statute provided:

Any one or more stockholders who desire to continue the business of a close corporation may avoid the dissolution of the corporation or the appointment of  a receiver by electing to purchase the stock owned by the petitioner at a price equal to its fair value. (emphasis added)

Success in the argument would turn on whether CA §4-603(a) applied to any kind of receiver (statutory or equitable), whether CA §4-603(a) applied only to situations where a receiver had been appointed in a dissolution proceeding, or whether  Aggrieved Shareholder’s plea for appointment of an equitable receiver was tantamount to a statutory receiver.

The Court briefly paused to explain the dilemma affecting “trapped” shareholders in close corporations: with no liquid market for shares, no board of directors, and transfer of shares made possible only on unanimous consent), a shareholder desiring to exit the company is suddenly pit against their partners and left with few options.  Such a shareholder can risk accepting a lower price per share in order to gain unanimous consent, or they can invoke dissolution and either end the going concern or be bought out.

The Court next turned to construe the meaning of CA §4-603: its plain language if clear while read in context of the surrounding statutory section(s); but with other indicia of intent if ambiguous (such as structure, caption, relationship to other laws, legislative history, and purpose, e.g.).  Citing to both CA §4-602 (Involuntary dissolution) and CA §4-603 (Avoidance of dissolution by purchase of petitioner’s stock), the Court made four general observations.

First, the Court pointed out that the captions had been written by the General Assembly and were part of the bills considered prior to enacting the statute, giving weight to the argument that CA §4-603(a) was intended only to apply in situations where a shareholder sought to avoid dissolution.

Second, the Court found the plain language of CA §4-603(a) confirmed the intent espoused by the caption, implying an option (1) created for shareholders who desire to continue the business of a close corporation and (2) one made necessary to spare the business from extinction.

Third, CA §4-603 routinely used the words petition or petitioner, which could only be read logically in conjunction with CA §4-602 as the shareholder/petitioner seeking dissolution in CA §4-602(a).

Fourth, the exchange of shares for value contemplated by CA §4-603 was only possible after a determination of fair value, defined by CA §4-603(b) as occurring on the close of business on the day when the petition for dissolution is filed.

If CA §4-603(a) only operated in the context of dissolution proceedings, did the phrase “or the appointment of a receiver” retain any meaning?  To find an answer, the Court looked to Title 3 of the Corporations & Associations Article, specifically CA §3-413 and §3-414 which defined grounds and process for involuntary dissolution proceedings.  CA §3-414 provided for the appointment of two types of receivers: a temporary receiver to operate the business pending final determination as to dissolution, and a liquidating receiver charged with the dissolution of the company.  Answering its question in the positive, the Court supposed a scenario in which the non-petitioning shareholder might opt to exercise the purchase right rather than suffer a perceived intrusive or meddlesome court-appointed temporary receiver.

Next examining the legislative history, the Court was further persuaded that the CA §4-603(a) purchase right only applied in dissolution proceedings, pointing to its own discussion of the legislative history in Papillo (199 Md. App. at 86), as well as the re-codification in 1975 of the Annotated Code which separated a single section, Article 23 §109 Judicial Dissolution – Close Corporations, into now CA §4-602 and CA §4-603, thus revealing the original legislative intent that they be construed together.  Under the express language of the original text, the buy-out right existed only in a dissolution proceeding.

Finding that CA §4-603(a) applied only to statutory receivers and only in the context of a dissolution proceeding, the Court turned to the last question: was CA §4-603(a)  invoked by a shareholder requesting appointment of an equitable receiver with powers authorized by CA §3-414?  The Court, noting that dissolution consisted of a particularly harsh irrevocable and “all or nothing” remedy, indicated that it had recommended equitable remedies short of dissolution in relevant Maryland caselaw, particularly the appointment of a non-liquidating receiver to continue the operations of the corporation for the benefit of all shareholders.  Aggrieved Shareholder, then, was entitled to seek an equitable remedy short of dissolution without triggering the CA §4-603(a) purchase rights.

The Court noted that while equitable receivers had broad applicability (partnership disputes, mortgagor-mortgagee disputes, divorce proceedings, e.g.) and enjoyed a long history, dating back to the chancery courts of England, such appointments were to be reserved for extraordinary circumstances involving fraud, danger of spoliation, or imminent prospect of loss or injury to property.  An equitable receiver’s authority did not extend to dissolution, which was only granted by statute to a receiver appointed to wind up the corporation’s affairs.

Accordingly, finding that Aggrieved Shareholder’s complaint requested appointment of an equitable receiver vested with authority to operate the Businesses, not to liquidate them, her complaint did not invoke dissolution, did not invoke Continuing Shareholder’s CA §4-603(a) purchase right, and did not compel Aggrieved’s transfer of shares to Continuing.  A shareholder who seeks equitable relief to stop alleged oppression should not have to do so at the risk of being forced to sell her shares to the alleged oppressor.

The Court denied the motion to dismiss, reversed the lower court's orders and ruling, and remanded to the circuit court.

The full opinion is available in PDF.

Ellis v. Palisades Acquisition XVI LLC, and Protas, Spivok & Collins, LLC (Maryland U.S.D.C.)

 

Filed: July 26, 2019

Opinion: Chief Judge James K. Bredar

Holdings:

(1) Defendants’ motion for summary judgement is denied because issues of intent, knowledge, and identity of debt are all factual issues that require discovery;

(2) Defendants’ motion to dismiss the Fair Debt Collection Practices Act (FDCPA) claim is denied because the claim is not barred by the statute of limitations and the complaint properly alleged that the debt at issue was incurred for “personal, family, or household purposes.”

(3) Defendants’ motion to dismiss the claim under the Maryland Consumer Debt Collection Act (MCDCA) is granted in part, and denied in part, because plaintiff could only plausibly allege that one of the defendants had knowledge that the underlying debt had been previously collected.

(4) Violation of the MCDCA is a per se violation of the Maryland Consumer Protection Act (MCPA) preventing dismissal of Plaintiff’s MCPA claim.

(5) Plaintiff failed to state a cause of action for abuse of process.

Facts:

Donald Ellis (“Plaintiff”) sued Palisades Acquisition LLC (“Palisades”) and Protas, Spivok & Collins, LLC (“Protas,” and collectively with Palisades, “Defendants”) alleging that Defendants attempted to collect a debt that Plaintiff did not owe, and consequently violated the FDCPA and Maryland state law. Plaintiff had a credit card with Providian Bank that was used primarily for personal, family, or household purposes. Plaintiff incurred a debt on the credit card upon which a judgment was obtained. Defendant Palisades ultimately became the owner of the Plaintiff’s debt.  

Palisades retained Asset Acceptance to collect the debt. Plaintiff paid Asset Acceptance to satisfy the debt; however, Palisades did not file a satisfaction of judgment in Maryland court acknowledging the payment. Instead, Palisades retained Defendant Protas, a law firm, to collect the debt for the second time. Plaintiff was unaware that Protas was attempting to collect the same debt as Asset Acceptance and filed a Motion for an Exemption from Garnishment.  Defendants, in the second attempt to collect the debt, obtained a garnishment order that was executed against Plaintiff’s bank account resulting in the funds being withdrawn and an overdraft charge against Plaintiff.

Alleging that Defendants were attempting to collect the same debt twice, Plaintiff filed this action claiming violations of the FDCPA, the MCDCA, the MCPA, and abuse of process. Defendants moved for summary judgement on all claims, or in the alternative, moved to dismiss the claims for failure to state a claim.

Analysis:

The court denied the Defendants’ motion for summary judgment because the Plaintiff raised issues that were genuinely in dispute and requiring discovery. Contrary to Plaintiff’s allegations, Defendants asserted that the debt at issue was actually two different debts. However, whether the debt is actually two debts or a single debt is a factual issue. Furthermore, Plaintiff is required to prove Defendants’ knowledge and intent as elements of the claims. Such factual issues preclude summary judgment.

Alternatively, the Defendants’ motion to dismiss was denied in part because Plaintiff plausibly alleged violations of the FDCPA and Maryland state law.

Defendants argue that Plaintiff’s FDCPA claim is barred by the one-year statute of limitations. However, while the Defendants’ attempt to collect the debt twice began more than a year before the suit was instituted, the Plaintiff asserts that he was unaware, and could not have reasonably known, that the debt being collected was the same in both instances. Thus, the discovery rule tolled the statute of limitations and the suit was properly brought within the limitations period.

Plaintiff also sufficiently alleged that Defendants violated the FDCPA. Violations of the FDCPA require the debt at issue to be incurred primarily for “personal, family or household purposes . . . .” 15 U.S.C. §1692(a). Plaintiff’s bald assertion that the credit card was used for personal, family, or household purposes, as required by the statute, is sufficient on its own to survive Defendants’ motion to dismiss.

The court granted Defendants’ motion to dismiss Plaintiff’s MCDCA claims as to Defendant Protas, but denied as to Defendant Palisades.  Violation of the MCDCA requires Plaintiff to prove that the Defendants knew that collection of the debt was improper. The court held that Plaintiff sufficiently alleged that Palisades knew collection of debt the second time was improper because it could be inferred that Asset Acceptance – the entity first contracted to collect the debt – informed Palisades of its successful collection of the debt. However, it was not alleged that Defendant Protas, who was subsequently contracted to collect the debt, had any knowledge of any previous efforts to collect the debt at issue. As such, the knowledge element required to be pled under the MCDCA had been met as to Defendant Palisades, but not as to Defendant Protos. Thus, the court granted Defendants’ motion to dismiss the MCDCA claim as to Defendant Protas.

The court denied the Defendants’ motion to dismiss the MCPA claims on the grounds that violation of the MCDCA is a per se violation of the MCPA.

Finally, the court granted the Defendants’ motion to dismiss Plaintiff’s abuse of process claim because Plaintiff failed to allege facts to support that Defendants instituted the action to satisfy an ulterior motive or that Plaintiff was damaged by Defendants’ perverted use of process.

 The full opinion is available in PDF