Blackstone v. Sharma (Ct. of Appeals)

Filed:  August 2, 2018

Opinion by:  Joseph M. Getty

Holding:  The Maryland Collection Agency Licensing Act does not require foreign statutory trusts to obtain a collection agency license before pursuing foreclosure actions against Maryland homeowners. 

Facts:

The instant action includes two cases consolidated before the Court of Special Appeals and two additional actions appealed directly from circuit court foreclosure proceedings.  While not identical, the four cases are substantially similar and amalgamated below. 

Petitioners are a group of foreign statutory trusts ("Trusts") and their substitute trustees (“Substitutes”); Trusts became beneficiaries in deeds of trust as part of securitized pools of defaulted mortgage loans and designated Substitutes to initiate foreclosure actions.  Respondents (“Homeowners”) are Maryland homeowners who defaulted on home loans made between 2006 and 2007.   

In each of the four cases, Homeowner obtained a loan on a Maryland home and within a few years missed a payment, defaulting on the note.  Sometime later, Trust acquired the debt obligation as part of a securitized pool and appointed Substitute to enforce the security interest.  Substitute initiated foreclosure proceedings sometime between 2014 and 2016. 

In response, Homeowner filed a counter complaint alleging Trust and Substitute had acted as a collection agency as defined under the Maryland Collection Agency Licensing Act (“MCALA”) when it purchased the defaulted loan, collected mortgage payments, and initiated foreclosure, but violated MCALA and the Maryland Consumer Debt Collection Act (“MCDCA”) by failing to acquire the required MCALA license.  Under the theory that any judgment obtained by an unlicensed entity acting as a collection agency would be void, Homeowner requested that the court dismiss or enjoin the foreclosure sale. 

Trust and Substitute argued in response that (1) they did not conduct business in Maryland, (2) they did not conduct business as a collection agency subject to MCALA, (3) MCALA did not apply to in rem proceedings, (4) foreign statutory trusts were exempted from MCALA, and (5) Homeowner had failed to specify a relevant defense under Maryland foreclosure law. 

The circuit court found Trust to have failed to provide convincing evidence that they constituted a trust company, a type of entity specifically exempted from relevant MCALA sections, and was therefore subject to MCALA’s licensing requirements.  Accordingly, the circuit court concluded Trust had no right to bring the foreclosure action and dismissed the case without prejudice. 

Trust and Substitute thereafter appealed to the Court of Special Appeals who consolidated the two cases and held that a foreign statutory trust must meet the MCALA licensing requirements unless some other MCALA exception applies.  The Court of Special Appeals held Trust and Substitute to be barred from bringing foreclosure action, affirming the judgment below. 

Trust and Substitute filed petition for writ of certiorari to the Court of Appeals.  The Court of Appeals granted certiorari in 2017 and consolidated the cases with two similar cases pending appeal in the Maryland court system. 

Analysis: 

In addressing each of the underlying cases, the court found six questions for review which ultimately hinged on the answer to one fundamental question: did the Maryland General Assembly intend to require foreign statutory trusts to obtain a collection agency license pursuant to MCALA before pursuing an in rem foreclosure proceeding? 

Such an inquiry required the court to undertake statutory construction analysis, beginning with the plain language of the statute, reviewing the legislative history to confirm or negate alleged latent intent, and finally considering external relationships to both subsequent and related legislation that fairly bore on the issue of legislative purpose. 

Turning first to the plain language of the statute, the court found MCALA to generally require a person to have a license whenever he does business as a collection agency in the State, which MCALA defined in BR § 7-101(d):

(d) “Collection agency” means a person who engages directly or indirectly in the business of:   

(1)

(i) collecting for, or soliciting from another, a consumer claim; or  

(ii) collecting a consumer claim the person owns, if the claim was in default when the person acquired it;

(2) collecting a consumer claim the person owns, using a name or other artifice that indicates that another party is attempting to collect the consumer claim;   

(3) giving, selling, attempting to give or sell to another, or using, for collection of a consumer claim, a series or system of forms or letters that indicates directly or indirectly that a person other than the owner is asserting the consumer claim; or  

(4) employing the services of an individual or business to solicit or sell a collection system to be used for collection of a consumer claim. 

While MCALA BR § 7-102(b) specifically exempted a list of entities including a trust company, it failed to define any of the entities.  And although the commonly understood meaning of collection agencies as entities sending letters, making calls, and filing collection suits for consumer debt aligned with a majority of the relevant § 7-101(d), the court found it not to comport with § 7-101(d)(1)(ii) which was added in a 2007 departmental bill, raising a question about whether the General Assembly intended to move away from the ordinary meaning it ascribed when MCALA was originally passed in 1977.

The court also identified the ambiguity in § 7-101(d)’s phrase “engages directly or indirectly in the business of.”  Because foreign statutory trusts act solely through trustees and substitute trustees and have no employees, offices, or identified pursuit in the State, the court found it difficult to conclude foreign statutory trusts engage either directly or indirectly in the business of a collection agency where it was difficult to reach a determination of whether they conduct business at all.

Homeowners pointed to a lack of ambiguity in the § 7-101 definition of consumer claim as “arising from a transaction in which the resident sought or got real property.”  But the court found this to be only incidental to whether the General Assembly intended to license certain actors in the mortgage industry as opposed to merely those actors in the collection agency industry.

Because of the substantial ambiguity, the court next turned to the General Assembly’s legislative history regarding consumer debt collection laws.  Looking at the State’s first collection agency licensing statute from 1977, the court found the statutory language at that time to intend only to require licensure for third party collection agencies that collected or solicited debt of others.  Moreover, the legislature at that time grouped together a subsection of exempted actors within the mortgage industry: banks, trust companies, savings & loan associations, building & loan associations, and mortgage bankers.  Further analysis indicated that the legislature anticipated a specific set of 110 collection agencies would be required to apply for a license, signifying an intent to specifically regulate these actors to prevent abusive practices in collection of retail and medical accounts.

In 2007, the Maryland Department of Labor, Licensing, and Regulation (“DLLR”) requested a bill which in relevant part changed the definition of collection agency to that described above in § 7-101(d).  Examining the bill request, the court found a narrowly tailored request to regulate actors in the collection industry employing a loophole to evade the licensing requirement by purchasing consumer debt in a goods & services contract.  The court therefore found the intent not to regulate actors outside the collection agency industry but to ensure all actors within that industry were in compliance with the MCALA licensing requirement and subject to its complaint resolution and regulatory oversight.

Further, DLLR’s fiscal estimate projected only 40 additional debt purchasers to be subject to the new 2007 definition and licensing requirement with an expected growth of only 2 additional licensees per year, a far cry from the projected effect on regulating an entirely new industry.

The court found this interpretation to be confirmed by the bill’s purpose paragraph, Fiscal and Policy Note, Floor Report, and written testimony by DLLR proponents and other supporters of the bill.  Moreover, the bill file lacked any written testimony in opposition from any representatives of the mortgage industry, who were vocal and active in their response to foreclosure reform bills in 2009.

Aggregating all of the components of the legislative history, the court was persuaded that the General Assembly did not intend to regulate or license mortgage industry actors such as foreign statutory trusts as collection agencies.

The court finally turned to subsequent and related legislation to confirm its interpretation.  A State Task Force had been created in 2007 to respond to rising foreclosure rates and recommend changes to laws and regulations in the mortgage industry.  The Task Force summarized the state of the mortgage industry at that time as comprising a primary and secondary market; the primary market originating loans to homeowners and the secondary market selling those loans as portfolios to reduce risk and recharge the assets of primary lenders.  In the Task Force’s explanation, this model only worked if business entities like statutory trusts could exist as mere repositories for the loans.  Trustees and substitute trustees would then be the actors who manage and control the trust’s assets, while the servicer would collect payments and interact with borrowers.

As it developed and delivered its recommendations, at no time did the Task Force invoke or mention MCALA or collection agency licensing requirements.  Further, the Task Force identified over 6,000 mortgage licensees under the State’s Mortgage Lender law and more than 10,000 originators, a stark contrast to the total 1,304 MCALA licenses at that time.

The General Assembly did take the Task Force’s eventual recommendations and enact proposals during its 2008, 2009, and 2010 sessions to create a comprehensive scheme for regulating the mortgage industry and foreclosure process to protect Maryland homeowners.  In short, the court found the General Assembly to have consciously separated the consumer debt industry under MCALA from the mortgage industry and did not intend MCALA to regulate mortgage industry actors involved in foreclosure proceedings.

Placing the final truss in the bridge, the court pointed to the General Assembly’s enactment of the Maryland Statutory Trust Act in 2010, which required foreign statutory trusts to register with the State Department of Assessments and Taxation (“SDAT”) prior to conducting business, and stating in relevant part: “the following activities of a foreign statutory trust do not constitute doing business in this State: … (5) foreclosing mortgages and deed of trust on property in this State[.]”

When viewing MCALA, foreclosure reform legislation, and the Maryland Statutory Trust Act together, the court found a clear General Assembly intent to regulate and license a separate collection agency industry through MCALA, to regulate the mortgage industry actors and process of in rem foreclosure proceedings through its foreclosure reform measures, and a specific effort to exempt trusts from having to obtain an SDAT registration when simply seeking a foreclosure.

Accordingly, the court held (1) that the General Assembly did not intend for foreign statutory trusts to be required to obtain a collection agency license under MCALA prior to filing foreclosure actions in circuit court, and (2) foreign statutory trusts to be outside the scope of the collection industry regulated and licensed under MCALA.

The full opinion is available in PDF.

WSC/2005 LLC v. Trio Ventures Associates (Ct. of Appeals)

Filed:  July 30, 2018

Opinion by:  Adkins, J.

Holding:  Although it is not recognized in the Maryland Uniform Arbitration Act (the “MUAA”), manifest disregard of applicable law is a proper ground to vacate an arbitration award.

Facts:  Plaintiff filed a petition to vacate an arbitration award in the Circuit Court for Montgomery County.  The petition argued that the arbitrator “manifestly disregarded well-established Maryland law in several respects” and that the arbitrator wrongly concluded the Plaintiff breached a contract provision.  Defendant moved to dismiss arguing that the Plaintiff did not allege any of the statutorily permitted vacatur grounds enumerated in the MUAA.

The MUAA governs the arbitration process in Maryland.  Once an arbitrator issues an award, a circuit court shall vacate an award on certain grounds enumerated in the MUAA.  The MUAA also provides that “the court shall not vacate the award or refuse to confirm the award on the ground that a court of law or equity could not or would not grant the same relief.”

Analysis:  The Court reviewed precedent decisions demonstrating that Maryland recognizes manifest disregard of the law as a permissible common-law ground for vacating an arbitration award.  The Court then analyzed whether the General Assembly abrogated the common law in this respect when it adopted the MUAA.

For an abrogation to occur, “the statutory language must indicate an express abrogation or an abrogation by implication by adoption of a statutory scheme that is so clearly contrary to the common law right that the two cannot occupy the same space.”  The Court agreed with Plaintiff that the MUAA does not pronounce an intention to expressly abrogate the common-law vacatur grounds.  The Court also agreed that the list of five grounds upon which a circuit court may vacate an award does not indicate the grounds are exclusive.  Further, the circumstances in which a circuit court cannot vacate an arbitration award under the MUAA do not include common-law vacatur grounds.

While disfavored, abrogation by implication is possible in two situations:  conflict preemption and field preemption.  The Court stated that conflict preemption does not apply because the common-law ground for “vacating an arbitration award will not conflict with any of the statutory grounds or render them nugatory.”  Field preemption occurs if a new enactment repeals and replaces the entirety of the prior law on a comprehensive basis.  Here, the Court stated that the MUAA’s “lack of universal applicability means the General Assembly did not preempt the entire field of arbitration common law.”

The Court then stated that manifest disregard of the law requires a “palpable mistake of law or fact appearing on the face of the award.  A court should look for an error that is readily perceived or obvious; an error that is clear or unquestionable.”  Finding no such mistake, the Court affirmed the Circuit Court’s dismissal.  

The opinion is available in PDF.

Young Electrical Contractors v. Dustin Construction (Ct. of Appeals)

Filed:  May 24, 2018

Opinion by:  Judge McDonald

Holding:

Maryland courts interpreting construction contracts under Virginia law will first look to the contract language and then to parol evidence to determine the intent of the parties regarding whether a construction subcontract contains a pay-when-paid or pay-if-paid clause.

Facts:

George Mason University (“Owner”) hired Dustin Construction (“General Contractor”) to renovate the school’s student union building, and General Contractor hired Young Electrical (“Subcontractor”) for the electrical work.

The Subcontract contained a provision “Contractor’s obligation to pay … Subcontractor … is contingent, as a condition precedent, upon Contractor’s receipt of payment from the Owner…” (Section 2(c)).

Subcontractor submitted cost increase requests to General Contractor, which submitted cost increase requests to Owner.  Owner rejected the request; General Contractor never paid the additional cost to Subcontractor.  Subcontractor sued General Contractor for breach of contract.  The Circuit Court for Montgomery County granted General Contractor’s motion for summary judgment.  Subcontractor appealed.

Analysis:

“Contract interpretation is governed by the law of the place of contract or the law chose by the parties.”  Cunningham v. Feinberg, 441 Md. 310, 326 (2015). However, the standard for summary judgment is governed by the law of the forum, in this case Maryland law. Goodwich v. Sinai Hosp. of Baltimore, Inc., 343 Md. 185, 204-207 (1996). Under the Maryland Rules, a circuit court may grant summary judgment only if there is no genuine dispute as to any material fact, and the moving party is entitled to judgment as a matter of law. Maryland Rule 2–501(f).

The Virginia Supreme Court has referenced Maryland law in examining the issue in this case.  The Maryland Court of Appeals relied on a 1962 Sixth Circuit case (Thos. J. Dyer Co. v. Bishop Int’l. Engineering Co.) when it examined the issue in Atl. States Const. Co. v. Drummond & Co. (1968) and Fishman Constr. Co. v. Hansen (1965).  In Maryland, Conditional Payment provisions are to be construed as timing provisions (pay-when-paid clauses) unless the contract language clearly indicates that the parties intended the clause to be a condition precedent (pay-if-paid clause). The Special Court of Appeals had affirmed the Circuit Court’s decision.  It held that Section 2(c) contained the “magic phrase” “condition precedent”.

The Court considered whether the General Contractor was entitled to summary judgment for the reason given by the Circuit Court and concluded it was not, then went through an analysis of the reason for summary judgement originally argued by the General Contractor. 

The full opinion is available PDF.

Maryland Financial Bank v. Congressional Bank (Cir. Ct. Mont. Cnty)

Filed: May 17, 2018

Opinion by: Judge Anne K. Albright

Holding:  Assignment of key obligations undertaken by a party to a contract containing an anti-assignment provision or other protective provision in favor of the non-assigning party is invalid and unenforceable if such assignment is made without the consent of the non-assigning party. 

Facts:  American Bank (“American”) originated a loan that was secured by a first lien against real property (the “Loan”).  American simultaneously entered into a participation agreement with Maryland Financial Bank (“MFB”) entitling MFB to an undivided 50% interest in everything arising from or out of the Loan and Loan documents.  The participation agreement provided that, among other things, American could not make material changes to the terms of the Loan without MFB’s consent or assign its obligations or duties as servicer of the Loan without MFB’s consent, but American could sell additional participations in the Loan (provided such action would not adversely affect the rights of MFB), control the course of action upon a Loan default after consulting MFB, and service the Loan.  MFB simultaneously sold a majority of its participation interest to National Bank of Cambridge, which later became 1800 Bank (“1800”).

American began to effect a plan of merger with Congressional Bank, during which time American declared a default on the Loan and, with the assistance of Congressional, assigned all of American’s right, title and interest in the Loan to Democracy Capital Corporation (“Democracy”). Congressional continued servicing the Loan after assignment to Democracy.  The assignment was made without MFB’s consent and, among other things, provided Democracy with a consent right before Congressional could take action upon an event of default and gave Democracy the right to terminate Congressional as the servicer.  MFB filed suit against Congressional and Democracy claiming that, by assigning the Loan to Democracy, Congressional had violated the participation agreement; 1800 was joined as a necessary party and all parties countered seeking a declaration as to their respective rights.  As part of a settlement agreement, Congressional transferred its servicing obligations to 1800 with MFB’s consent and over Democracy’s objections, and MFB, 1800 and Congressional dismissed their claims against each other; however, MFB, Democracy and 1880 were still seeking declaratory judgment as to 1880’s and Democracy’s rights and obligations relating to the Loan.  Democracy argued that 1800 did not have standing to seek a declaratory judgment as it was not a party or third-party beneficiary of the assignment between Democracy and American/Congressional.

Analysis:  As an initial matter, the Court held that, because 1800 was a party to the settlement agreement, it had standing to bring an action for declaratory judgment. Applying the “cardinal rule of contract interpretation” to “give effect to the parties’ intentions,” the court further held that the assignment to Democracy of certain of American’s key obligations related to the Loan violated the terms of the participation agreement.  Although the participation agreement gave American the right to sell participation interests in the Loan on terms different from those in participation agreement with MFB, American could not involve other participants in a manner that would adversely affect the rights and obligations of MFB.  After the assignment, not only did Democracy have the same right as MFB to prevent Congressional from assigning the servicing obligations, it could actually terminate Congressional as the servicer; Democracy also had final say as to the course of action upon a Loan default.

Democracy’s claim that the assignment of the servicing from Congressional to 1800 without Democracy’s failed because the court held that Democracy never had the right to consent to such assignment in the first place as the provisions of the assignment of the Loan to Democracy purporting to give Democracy the right to terminate Congressional as the servicer and withhold consent to any assignment by Congressional of its servicing obligations were invalid.  Therefore, 1800, as the sole servicer of the Loan pursuant to the settlement agreement, was the only party who had the right to foreclose on the real property that had been mortgaged as collateral for the Loan. 

Full text of opinion available here.

Laidlaw v. Beneficial Bancorp, Inc. (Cir. Ct. Balto. Cnty)

Filed:  August 8, 2017
Opinion by: Judge Pamela J. White

Holding: A stockholder can file a derivative claim action against a corporation, without serving a pre-suit demand on a board, if it can shown that a demand would be futile.

Facts: Plaintiff brought suit against company Board of Directors in a derivative suit on behalf of company alleging that the individuals named breached a fiduciary duty owed to the company and were unjustly enriched as a result. After company completed a mutual stock conversion, the Board voted to award themselves more than 1 million shares as a part of a compensation package. The company provided its non-employee directors an average total compensation of $77,521 per non-employee director, while the CEO received $1,712,899 in compensation during the same period. A stock plan was approved by stockholders at the corporations annual meeting. Under the stock plan the Board reserved 3,500,000 shares of company stock. They later awarded themselves 1,043,416 of the reserved stock as a bonus for their role in the mutual-to-stock conversion. The value of the stock due to be disbursed was more than $14 million.

Plaintiff filed suit derivatively on behalf of the company less than a year after the stock plan was approved without making a demand. Defendants filed a Motion to Dismiss.

Analysis:

Plaintiff alleged that the Board breached their fiduciary duty of loyalty to the company by engaging in impermissible self-dealing. He argued that as result the Board was unjustly enriched and disgorgement was warranted. The Defendants argued for a dismissal on the grounds that a pre-suit demand was never submitted on the Board prior to the lawsuit. Plaintiff’s complaint gave inference that the demand would’ve been futile in this case because the board could not have objectively decided on a pre-suit demand due to its’ self-dealing in the stock plan.

“In order to maintain this balance of managerial power, a complaining stockholder generally speaking….must make demand upon the corporate board to commence the action and show that this demand has been refused or ignored before he may file a suit derivatively behalf of the company” Parish v. Md. & Va. Milk Producers Ass’n, 250 Md. 24, 81-82 (1968).  “Failure to serve a pre-suit demand can result in a dismissal of a derivative complaint.” Werbowsky v. Collomb, 363 Md. 581, 620-21(2001).  Here, Plaintiff argued that the demand should be excused because the board was personally and directly conflicted or committed to preserving their self-compensation.

Defendants argued that no member of the board was disqualified because of the fact that a director expected to derive a personal benefit from a corporate transaction. They argued that demand was not futile because the stock award was recommended by the Board’s four-member Compensation Committee and that a bare majority of the nine-member Board  could have fairly considered the Plaintiff’s pre-suit demand.  The Court decided that due to the outsized nature of the award at issue, one could reasonably infer that the Defendants were conflicted to a degree sufficient to excuse demand under Werbowsky.

In its’ analysis of one the counterarguments of the Defendants, the Court went on to state that “the question is whether a majority of the Board has a personal interest in not disturbing the decision that is sufficiently significant to overwhelm their better judgment.” In re Regions Morgan Keegan Securities, Derivative Erisa Litig., 694 F. Supp. 2d 879, 884 (W.D. Tenn. 2010).  Here, each member of the Board has a personal financial interest in the stock award with the stock award being more than four times the salary the President/CEO earned in the year prior to the stock award. The non-employee defendants’ interest in the stock was more than eleven times larger than their compensation from the previous year.

Defendants tried to rely upon the presumption of good faith of the business judgment rule. and that was deemed by the Court to be inapplicable to the circumstances. However since the Board’s actions were not from a disinterested position, they could not enjoy the protection’s of the rule.

The Defendants also argued that because the stockholders ratified the stock award, they were well within their rights to distribute the stock award. Under Md. Code Ann., Corps & Ass’ns § 2-419 (a) & (b)(1)(ii) Maryland law shields transactions between a corporation and its directors against stockholder derivative suits if, after the directors’ interest is disclosed, the “transaction is authorized, approved or ratified by a majority of votes cast by the disinterested stockholders entitled to vote.” The Court stated that the Board abused its power when it adopted the stock award and therefore could not adopt this protection. “The grant of authority for directors to set their compensation, is not a statutory safe harbor for director compensation decisions.” Sample v. Morgan, 914 A. 2d 647, 664 (Del. Ch. 2007). The Court cited that the stock plan did not inform stockholders the Board intended to give themselves a one time stock award of 1 million shares of stock. The Court decided that since stockholders were not properly informed the protection of shareholder approval under § 2-419 would not apply.

The Defendants also failed to provide a defense that would warrant a dismissal of the unjust enrichment claim.

The full opinion is available in PDF.

Meso Scale Diagnostics v. Crescendo Biosciences (Cir. Ct. Mont. Cnty.)

Filed: November 29, 2017

Opinion by: Judge Rubin

Holding:

The post-termination materials requirements contract provision was enforceable despite it being removed during negotiations. In resolving a contract dispute, governed by Delaware law, the court may consider extrinsic evidence of the parties’ intentions.

Facts:

William Hagstrom (“Hagstrom”) formed Defendant in 2007 to commercialize Vectra DA, a test for rheumatoid arthritis.  On March 2, 2009, Defendant accepted Plaintiff’s proposal to evaluate the Vectra DA test’s viability.  The parties began to negotiate for a long-term supply agreement in 2010 after the development phase.  Both parties were invested in their relationship for the long-term, and Defendant knew that Plaintiff wanted to share in the long-term success of Vectra DA. Hagstrom understood that Plaintiff would not move forward with signing the agreement without some means of sharing in the upside potential if the product was commercially successful.

Section 10.1 of the Purchase Agreement contained the post-termination provision.  The Court found Plaintiff’s General Manager’s, Jim Wilbur’s (“Wilbur”), testimony more credible than Hagstrom’s testimony regarding Wilbur explaining Section 10.1 to Hagstrom.  Hagstrom denied Wilbur explained it and further argued that he never intended Defendant to be bound to deal with Plaintiff after the contract’s termination.  During the negotiation process, the provision was removed and re-inserted at least once, but the agreement that Hagstrom signed on April 2, 2012, included Section 10.1. 

On April 21, 2016, Defendant notified Plaintiff that it intended to terminate the agreement effective on April 30, 2018.  Plaintiff sued Defendant on May 23, 2016. (see the opinion for litigation details).

Analysis:

In Delaware, the parties’ subjective expressions are considered when a contract is negotiated between parties on an equal footing and the contract/provision is ambiguous.  SIManagement L.P. v. Wininger, 707 A.2d 37 at 43 (1998).  Extrinsic evidence that is considered “must speak to the intent of all of the parties to the contract.”  Id.  In addition, contracts “should be read to give effect to all its provisions and not to render any part of it ineffective.”  Restatement (Second) of Contracts § 203(a) (1981).

The Court acknowledged that Hagstrom was a “seasoned biotech entrepreneur with more than three decades of executive and board-level experience”, having raised $100 million for Defendant from venture capital firms.  In addition, the contract was reviewed by a global law firm.  The Court found Section 10.1 was a “business compromise” and the materials requirement was a “central element of the bargained for exchange”.

The full opinion is available PDF.

Neitzey v. Allen (Cir. Ct. Mont. Cnty)

Filed: August 31, 2017

Opinion by: Judge Michael D. Mason

Holding:  A covenant not to solicit clients that is overbroad on its face will be interpreted based on the wording of the agreement and is not partially enforceable if the employer voluntarily commits to limit its right of enforcement to only those remedies necessary to protect the employer’s legitimate business where such partial enforcement is not achievable based on the wording of the agreement. 

Facts:  A former employee sued his former employer to have certain restrictive covenants stricken from his employment agreement as overbroad.  At issue was a non-solicitation provisions that restricted the former employee from soliciting and accepting business from any customer of the former employer.  The term “customer” was not defined in the employment agreement and was not limited to customers of the former employer during the former employee’s employment by the former employer.  The former employer offered to restrict the meaning of “customer” to those with whom the former employee had personal contact while employed by the former employer. 

Analysis:  The court held that the former employer’s offer to limit enforcement of the non-solicitation provision could not save the provision from being declared unenforceable.  After a lengthy discussion of Holloway v. Faw, Casson & Co., 78 Md. App. 205 (1989) (“Holloway”), Holloway v. Faw, Casson & Co., 319 Md. 324 (1990), and Fowler v. Printers II, Inc., 89 Md. App. 448 (1991), the court agreed with the Court of Appeals in Holloway, that the enforceability of the non-solicitation provision at issue turned on its internal severability.  The non-solicitation provision at issue was not internally severable because, without some measure of damages on a client-by-client basis similar to the liquidated damages clause in Holloway*, there was no way to establish separate damages for clients with whom the former employee had personal contact and the other clients of the former employer.  Therefore, the non-solicitation provision could not be enforced even if the court limited enforcement in the manner proposed by the former employer.

* In Holloway, the non-solicitation provision was accompanied by a liquidated damages provision equal to 100% of the prior year’s fee for any clients solicited in violation of the non-solicitation provision.

Full text of opinion available here.

Comptroller of the Treasury v. Jalali (Ct. of Special Appeals)

Filed: January 31, 2018

Opinion by: Judge James A. Kenney III

Holding: The Court of Special Appeals held that: (1) the question of whether advances of money to a business are considered debt or equity (the “debt-equity” question) is a mixed question of law and fact; (2) in deciding the debt-equity question, the Maryland Tax Court applied correct legal principles and properly evaluated the relevant facts and circumstances when it found that a taxpayer’s advances of money to business entities were advances of debt; and (3) the Court of Special Appeals would not consider an issue not raised by the Comptroller before the Tax Court because, on judicial review of administrative agency decisions, the Court of Special Appeals is restricted to the record before the agency and generally does not consider issues not encompassed in the agency’s final decision (although the Court went on to find that a taxpayer’s advances constituted bad business debt because the record supported a finding that the taxpayer’s dominant motivation for making the advances was to protect his employment).

Facts: Taxpayer made several advances to businesses he owned or in which he had an ownership interest. Each advance was documented by a written promissory note containing a loan amount, loan period, interest rate, and other repayment terms. The interest and repayment terms of the notes were not strictly complied with or enforced. None of the advances were secured. Ultimately, the businesses failed and the advances were not repaid. Taxpayer filed amended tax returns with the Maryland Revenue Administration division and the Internal Revenue Service for the relevant tax year. The amended returns reported the unpaid advances as unreimbursed business expenses and sought a resulting carried-back net operating loss and tax refund. The Comptroller rejected the returns. Taxpayer requested a final determination, and the Comptroller issued a Notice of Final Determination denying the requested refunds, in part, because (i) proof of acceptance of one applicable return by the IRS had not been provided; and (ii) the advances were not bona fide loans. Taxpayer appealed to the Maryland Tax Court, which reversed the Comptroller’s determination and granted the requested refunds. The Comptroller filed a petition for judicial review, and the Circuit Court for Anne Arundel County affirmed the Tax Court. On appeal by the Comptroller, the Court of Special Appeals affirmed the Tax Court’s decision.

Analysis:  The Court of Special Appeals first held (in contrast to Fourth Circuit precedent) that the debt-equity question is a mixed question of fact and law. Therefore, the Court limited its review of the Tax Court decision to determining whether “a reasoning mind reasonably could have reached the factual conclusion that the Tax Court reached”. Applying this standard, the Court found that, in addressing the debt-equity question, the Tax Court properly evaluated the facts of the case in light of many of the factors deemed relevant by applicable case law, including the adequacy of capitalization of the businesses, availability of outside financing, the presence of written promissory notes, the presence of stated loan terms, the unsecured position of the advances, the failure of the businesses to comply with interest and repayment terms, the taxpayer’s subjective intent, and the source of repayments. The Court then addressed the Comptroller’s claim that, even if the advances at issue were debt, the advances were non-business bad debt and therefore not deductible. The Court held that it would not consider the argument because it had not been raised before the Tax Court, noting that “[o]n judicial review of administrative agency decisions, we do not ordinarily ‘pass upon issues presented to us for the first time on judicial review.’” Nevertheless, the Court went on to find that there was sufficient evidence in the record that the taxpayer’s “dominant motivation” in making the advances at issue was to protect his employment, and, as such, the advances constituted deductible bad business debt.

The full opinion is available in PDF.