Garner v. ClaimAssist, LLC (Maryland U.S.D.C.)

Filed: August 9, 2018

Opinion by: Judge Hollander

Holding:  An entity seeking to collect a nondefaulted debt on behalf of another entity is not considered a debt collector as defined by the Fair Debt Collection Practices Act ("FDCPA").

Facts:  Plaintiff was injured in a car accident and received medical treatment for her injuries at a hospital ("Hospital"). Plaintiff retained a lawyer to pursue a tort case relating to the accident.

Hospital’s sole member (the "Member") hired defendant to identify and seek reimbursement from third-party payors in auto liability accounts. Member transferred these accounts before they were in default. Defendant would then reach out to the patient to determine the appropriate third-party payor.

Plaintiff’s medical account was transferred to defendant to identify the proper third-party payor. Defendant sent a letter to the attorney retained to notify the plaintiff of the unpaid medical bills and that a hospital lien had been filed and attached to any reimbursement of funds as a result of the accident.

Plaintiff’s medical bill related to the accident was $801.16. Plaintiff has medical insurance and U.S. Medicare. Plaintiff alleges that the Hospital should have received payment through her medical insurance. As of April 28, 2015, the Hospital has not processed the bill. Plaintiff alleges that the debt was therefore "plainly false, inaccurate, deceptive, and/or misleading."

The defendant moved for summary judgment arguing that they are not a debt collector under the FDCPA.

Analysis: The FDCPA was enacted to protect consumers from "false, deceptive, or misleading" debt collection practices. 15 U.S.C. § 1692(e). To establish a claim under the FDCPA, one must prove: “(1) the plaintiff has been the object of collection activity arising from consumer debt; (2) the defendant is a debt collector as defined by the FDCPA; and (3) the defendant has engaged in an act or omission prohibited by the FDCPA."

The FDCPA differentiates a debt collector from a creditor by looking at the status of the debt when assigned to the entity. The status of the entity will change depending on whether the debt was or was not in default when acquired by the entity.

The FDCPA defines a debt collector as

any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.

15 U.S.C. § 1692a(6).

The FDCPA excludes as a debt collector "any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another . . . which was not in default at the time it was obtained." 15 U.S.C. § 1692a(6)(F)

The FDCPA defines a creditor as:

any person who offers or extends credit creating a debt or to whom a debt is owed, but such term does not include any person to the extent that he receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another.

15 U.S.C. § 1692a(4).

Courts have included within the term creditor, and not debt collector, entities collecting debts assigned to them before default. The intention was to exclude loan servicers of debt that was not in default to be included as a debt collector under the FDCPA.

There is no dispute of material fact of whether the account was in default when the Member transferred the account to defendant. Plaintiff failed to present any evidence showing the account was in default. Further, defendant was seeking to collect the debt of another, the Member. Defendant, therefore, falls under the 15 U.S.C. § 1692a(6)(F) debt collector exclusion reserved for an entity collecting nondefaulted debt of another.

Therefore, the Court granted the Summary Judgment Motion as to plaintiff’s FDCPA Claims.

The full opinion is available in PDF. 

Ellicott Dredges, LLC v. Ananda Shipyard & Slipways LTD (Maryland U.S.D.C.)

Filed: September 14, 2018

Opinion by: Catherine C. Blake, United States District Judge 

Holding:                                                      

The United States District Court for the District of Maryland denied Defendant’s motion to dismiss for lack of personal jurisdiction, holding Defendant, Ananda Shipyard & Slipways LTD, subjected itself to the jurisdiction of the state of Maryland when it consented to a valid freely-negotiated forum-selection clause.

Facts:

On January 19, 2012 Ellicott Dredges, LLC (“Ellicott”) and Ananda Shipyard & Slipways LTD (“Ananda”) entered a Joint Venture Agreement to “build and sell dredges, ancillary crafts and accessories to the government of Bangladesh.” In addition, about one year later the parties signed a License Agreement through which Ellicott licensed some of its products to Ananda, complete with mutual non-compete clauses. This License Agreement also stated that all disputes arising under the agreement would be resolved by the federal district court in Baltimore, Maryland:

            

Notwithstanding what is provided elsewhere in the Contract, disputes regarding the license agreement…will be handled as provided below in this clause 7.6…[Ananda]…hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the (federal) courts of the State of Maryland and of the United States of America (located in the City of Baltimore) for any actions, suits or proceedings arising out of or relating to this clause of this agreement.

The parties’ Joint Venture was successful and, as a result, Ananda entered four different Purchase Orders, governed by the “laws of the State of Maryland.” Further, these Purchase Orders stated Ananda was to secure letters of credit from specific banks. Ellicott alleges that Ananda violated several provisions of these orders, including its obligation to acquire said letters of credit.

As a result of these breaches, in December 2014 the parties entered a Separation Agreement, formally titled, “Amendments to Deed of Agreement dated 19^th January, 2012 and License Agreement dated March 15, 2013.” By its own terms, the Separation Agreement was executed “to supplement and/or alter certain provisions of the [Joint Venture Agreement] and License Agreement in order to elucidate the extent and the ambit of relationship between the parties.” Among other things, the Separation Agreement removed the non-compete restrictions on Ellicott’s conduct. The Separation Agreement also stated that the Separation Agreement, “the [Joint Venture Agreement] and the License Agreement and all non-contractual obligations arising from or in connection with the same shall be governed and enforced in accordance with the governing law and enforcement provisions contained in Clause 7.6 of the License Agreement.” 

Despite these modifications, Ananda sent Ellicott a demand letter in December 2017 claiming Ellicott violated the non-competition provision of the License Agreement. One month later, Ellicott filed suit seeking a declaratory judgment on the parties’ rights and obligations under the Separation Agreement and claiming Ananda breached its obligations under the Joint Venture Agreement, Purchase orders, and License Agreement, as amended by the Separation Agreement.

Analysis:

The federal court had to determine several interrelated legal issues, including whether it had jurisdiction over the dispute, and whether the forum selection clause in incorporated into the Separation Agreement was constitutionally enforceable.  In evaluating the enforceability of this clause, the court had to decide what substantive contract law would apply using Maryland's choice-of-law rules.

(1)  Personal Jurisdiction Standard of Review

A court’s assertion of personal jurisdiction over a nonresident defendant must comply with two requirements: (1) the exercise of jurisdiction must be authorized under the state’s long-arm statute; and (2) the exercise of jurisdiction must comport with the due process requirements of the Fourteenth Amendment. Carefirst, 334 F.3d at 396.  For purposes of its analysis, the court concluded that Maryland’s long-arm statue is coextensive with the limits of the due process clause. Id.

The due process clause permits parties to waive their challenge to personal jurisdiction by “either implicitly or explicitly” consenting to the court’s jurisdiction. Foster v. Arletty 3 Sarl, 278 F.3d 409, 413 (4^th Cir. 2002). Further, a party may consent through a “valid forum selection clause,” which courts have held “is enough to confer personal jurisdiction on a nonresident defendant.” CoStar Realty Information, Inc. v. Field, 612 F. Supp. 2d 660, 668 (D. Md. 2009). Maryland has long enforced freely negotiated forum-selection clauses.

A federal court exercising diversity jurisdiction must apply the substantive law of the state in which it sits, including the state’s choice-of-law rules. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). Under Maryland law, if “the contract contains a choice of law provision,” the court must apply “the law of the specified jurisdiction.” Cunningham, 107 A.3d 1194, 1204 (Md. 2015).

Where a contract is silent as to the substantive law to be applied, a court applying Maryland's choice-of-law rules "[must] apply the law of the jurisdiction where the contract was made.” Id.  A contract is “made where the last act necessary to make the contract binding occurs.” Riesett v. W.B. Doner & Co., 293 F.3d 164, 173 n.5 (4^th Cir. 2002). The parties and circuit precedent agree that the last act necessary to make a contract binding is the final party’s signature. 

(2)  Personal Jurisdiction Standard of Review Applied to Ananda

The relevant contract for this Analysis is the Separation Agreement, which modified the License Agreement, and is therefore the most current expression of the parties’ relationship. The last act required to form the Separation Agreement, the final signature, occurred in Maryland when the agreement was signed by Ellicott’s representative and therefore Maryland law applies. And because the Separation Agreement selected this forum to resolve the parties’ disputes through its incorporation of clause 7.6 of the License Agreement Ananda consented to this court’s jurisdiction. 

Ananda has not claimed that the forum selection clause is invalid and unenforceable under Maryland law. Instead, Ananda argues that by its terms the clause only governs “actions…arising out of or relating to” the clause itself. In Ananda’s view, it only consented to the court’s jurisdiction for disputes over the scope of the clause. The court dismisses this argument, explaining, “If the forum selection clause only governs claims arising out of the forum selection clause then the parties agreed to have this court engage in a circular exercise: the court can decide whether it has jurisdiction to decide if it has jurisdiction and so on. That is an absurd reading, unsupported by common sense or the very clause Ananda attempts to interpret.” 

The court further highlights that what the parties intended by their forum selection clause is written right above its text: “notwithstanding what is provided elsewhere in the Contract, disputes regarding the license agreement or intellectual property or confidential data will be handled as provided below in this clause 7.6.” And further, Ananda consented to “irrevocably and unconditionally waive any objection to the laying of venue of any action, suit or proceeding arising out of this agreement or the transactions contemplated hereby.”

The full opinion is available in PDF.

Atlas Master Fund, LTD. v. Terraform Global Inc. (Cir. Ct. Mont. Co.)

Filed:  January 3, 2019

Opinion by:  Judge Rubin

Holding:  To determine whether a claim under the Securities Act of 1933 adequately alleged omissions from a registration statement, a court will review whether there is a substantial likelihood that the disclosure of the omitted information would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.

Facts:  A Delaware corporation (the “Company”) with its principal office in Bethesda, Maryland, was formerly controlled by its sponsor/parent (“Parent”) in a YieldCo structure.  A YieldCo is a tax-efficient financing structure that exists largely to benefit the sponsor, by allowing “the sponsor to tap the public equity markets without giving up control of the underlying assets.”  The Company completed an IPO on July 31, 2015 at $15.00 per share of common stock.  The Company’s stockholders were paid $5.10 per share when it was acquired by a third party in December 2017.  Plaintiffs are investment funds that bought shares in the IPO and brought suit alleging the loss in value in the span of two years, resulted in large measure, from material representations and omissions in the Company’s registration statement. 

The registration statement provided that any material transaction between the Company and Parent would require the approval by the Company’s conflicts committee, which was composed entirely of independent directors (the “Conflicts Committee”).  On November 20, 2015, the Company’s board allegedly terminated the two members of the Conflicts Committee following the Committee’s failure to approve a transaction requested by Parent.  Later the same day, three new members were added to the Company’s board and approved the transaction. 

The registration statement also provided an assurance that Parent, which borrowed money to purchase and develop the assets it sold to the Company, had adequate capital and access to the capital markets to make acquisitions and to develop projects.  Plaintiffs alleged the registration statement failed to disclose that, at the time of the IPO, Parent needed a $169 million loan to satisfy an undisclosed margin call related to an earlier acquisition by Parent.  While the loan closed after the IPO in August 2015, plaintiffs alleged the terms were known before the offering.  The interest rate exceeded the disclosed average annual interest rate by 500%. 

The defendants, which included the Company and persons who served as officers and directors of both the Company and Parent, filed a motion to dismiss arguing that the plaintiffs failed to plead viable claims for relief under the Securities Act of 1933.

Analysis:  With respect to alleged omissions from a registration statement, a court will review whether there is a “substantial likelihood that the disclosure of the omitted [information] would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”  Under circumstances where a registration statement contains both seemingly accurate and inaccurate information, “the Supreme Court has cautioned that ‘not every mixture with the true will neutralize the deceptive.  If it would take a financial analyst to spot the tension between the one and the other, whatever is misleading will remain materially so, and liability should follow.”

The Court found factual questions existed whether the registration statement was misleading with regard to each of the following aspects: (a) the Conflicts Committee, which was represented to be an effective control against self-dealing by Parent; (b) Parent’s then-existing financial condition and ability to raise capital to acquire and fund drop-down projects; and (c) Parent’s ability to disengage from the YieldCo model and decline to drop-down projects to the Company if Parent could get a better deal elsewhere. 

Conflicts Committee.  The Court stated that while the registration statement disclosed Parent’s ability to appoint all of the Company’s directors, including members of the Conflicts Committee, “a fair reading of the registration statement makes it seem that there would be a meaningful check in place to block overreaching by Parent regarding drop-downs.  No rational investor would equate the power to appoint [the Company’s] directors with the power to sack an independent Conflicts Committee, at will, and replace it with loyalists, the first time [the Company’s] Conflicts Committee rejected” a proposal. 

Parent’s Financial Condition.  The plaintiffs alleged that, although the loan closed in August 2015 after the IPO, the terms were known before the offering.  Plaintiffs conceded that the registration statement warned generally about the Company’s dependence upon Parent, and need for liquidity.  The Court stated that a registration statement may be misleading if “it fails entirely to disclose a material risk that is already known by the company” and concluded that it is a reasonable inference that certain defendants “knew of these impending, and imminent material financial events on July 31, 2015.”  The Court noted that the registration statement did not disclose the Parent’s need to secure the $169 million loan, which “likely would have alerted potential investors of material risks, otherwise unknown to the public.”  The Court disagreed with defendants’ contention that the Company had no duty to disclose any information about Parent’s financial condition, even if it knew about it, due to the YieldCo structure and the Company being completely controlled by Parent.

Ability to Disengage.  The Court recognized this part of plaintiffs claim as being more tenuous.  While the registration statement did not say that Parent could, at will, simply abandon the Company, “the offering documents did say that neither party was required to buy or sell any project, or to do so on any particular terms.”  Giving plaintiffs the benefit of all favorable inferences, the Court was disinclined to dismiss this part of the claim. 

The Court denied the motion to dismiss.  The Court also discussed the doctrine of class action tolling.  

The opinion is available in PDF.

Omni Direct v. Creative Direct Response (Cir. Ct. Mont. Co.)

Filed:  December 18, 2018

Opinion by: Judge Rubin

Holding:  Section 11-1207 of the Maryland Uniform Trade Secrets Act (MUTSA), which provides for both legal and equitable remedies in the event of a misappropriation of a trade secret, displaces common law claims that could be based on the same set of operative facts, even if “extra” facts are added to the other claims.

Facts:   Two direct mail marketing companies, Omni Direct (Omni) and Creative Direct Response (Creative), signed an NDA to pursue a business development collaboration for targeting the Hispanic community based on Omni’s expertise in this field.  Omni later sued Creative for allegedly using confidential information from Omni to start its own in-house Hispanic marketing program.

Analysis:  11-1207 of Maryland’s Commercial Law Article “displaces conflicting tort, restitutionary and other law…providing civil remedies for misappropriation of a trade secret.”  The purpose of this provision is to avoid pleading in the alternative if a Court decides during the trial that the information is not a trade secret.

This provision, adopted by other states from the Uniform Trade Secrets Act (USTA), has divided courts across the United States into three camps, although Maryland has not examined it in detail.  One, some courts throw out all duplicate common law claims, except contract-based remedies, even if the Court decides the information is not a trade secret.  Two, other courts allow a plaintiff to pursue other civil remedies in that lawsuit.  Three, a final group of courts take a middle of the road approach and displace other claims that are “based solely on the alleged misappropriation of a trade secret.”  Maryland courts have not had the opportunity to evaluate the displacement provision.

Here, the Circuit Court for Montgomery County dismissed Counts IV through VII because they were “grounded in the same core of operative facts” as Counts I through III which claimed a trade secret violation under MUTSA.  Adding “extra” facts and pleading in the alternative is exactly what the USTA sought to avoid with the displacement provision.

The full opinion is available PDF.

Price v. Murdy (Ct. of Appeals)

Filed: December 18, 2018

Opinion by: Barbera, C.J.

Holding:

The Maryland Consumer Loan Law (“MCLL”) is considered an “other specialty” under Md. Code Ann., Cts. & Jud. Proc. § 5-102(a)(6), so any MCLL claim has a twelve-year statute of limitations.

Facts:

Two consumers financed the purchase of their vehicles through loans under $6,000.  The consumers brought a putative class action against a lender for violating the MCLL. The MCLL provides, among other matters, that a person may not engage in the business of making loans unless the person is licensed or meets certain exemptions.  The consumers alleged that the lender was unlicensed under the MCLL.  They further alleged that the lender failed to provide notice of repossession, as well as charged compound interest and inappropriate attorney fees.

The consumers brought this action after Maryland's blanket three-year statute of limitations, therefore the lender asserts that this claim should be barred.  However, the consumers argue that MCLL is an “other specialty” statute, allowing the claim to be brought within a twelve-year statute of limitations.

The United States District Court for the District of Maryland presented a certified question of law to the Maryland Court of Appeals: “Whether the MCLL § 12-302's licensing requirement is an "other specialty" subject to Maryland's twelve[-]year limitations period under [CJP] § 5-102(a)(6)?”

Analysis:

The general statute of limitations in Maryland is three years for civil actions.  CJP § 5-101.  There are exceptions, one of which is a twelve-year statute of limitations for any specialty statute.  CJP § 5-102(a)(6).

The Maryland Court of Appeals addressed a similar issue in Master Fin. Inc. v. Crowder, 409 Md. 51 (2009), when addressing whether the Maryland State Secondary Mortgage Loan Law was an “other specialty” and therefore subject to the twelve-year statute of limitations.

The Crowder Test lays out three elements that must be met for a statute be an “other specialty,” making the twelve-year statute of limitations apply:

(1) the duty, obligation, prohibition, or right sought to be enforced is created or imposed solely by the statute, or a related statute, and does not otherwise exist as a matter of common law;

(2) the remedy pursued in the action is authorized solely by the statute, or a related statute, and does not otherwise exist under the common law; and

(3) if the action is one for civil damages or recompense in the nature of civil damages, those damages are liquidated, fixed, or, by applying clear statutory criteria, are readily ascertainable.

Crowder, 409 Md. at 70.

Applying the Crowder Test, the parties agree that only prong one and three were at issue.

Prong One: The Court of Appeals concluded that the MCLL’s licensing requirement is part of a statutory scheme that includes but is not limited to licensing, interest rates, and attorney fees.  Therefore, the licensing requirement is “created or imposed solely by the statute,” and prong one is fulfilled.

Prong Three: The Court held that “readily ascertainable” is not mutually exclusive from the requirement of fact-finding to determine the damages.  Readily ascertainable should not be confused with “relative ease of proof.”  The Court of Appeals held that the third element is satisfied as the documents and additional information provided by the lender and consumers would allow the damages to be “readily ascertainable.”

The full opinion is available in PDF.

URS Corp. v. Maryland-National Capital Park & Planning Commission (Ct. of Special Appeals, Unreported)

Filed: July 6, 2018

Opinion by: Judge Doug Nazarian

Holding: Separate indemnification provisions in multiple documents that form a single agreement between the parties are not in conflict with each other where one indemnification provision provides a duty to defend but the other is silent. 

Facts:  The Maryland-National Capital Park and Planning Commission (the "Commission"), as part of Montgomery County, and URS Corporation ("URS") entered into an agreement for URS to provide the Commission with engineering services for the construction of the Rock Creek Hiker-Biker Trail Bridge over Veirs Mill Road.  The agreement consisted of: (1) a basic ordering agreement between Montgomery County and URS for transportation and engineering services to facilitate the planning and design of various projects (the "BOA"); (2) a request for proposal, extending the basic ordering agreement to include the Commission as a party; (3) a task order issued by the Commission for the specific engineering services; (4) a proposal from URS in response to the task order; (5) a contract between the Commission and URS for the specific engineering services (the "Contract"); and (6) the Commission's procurement rules, regulations and laws.  The BOA contained an indemnification provision that, in addition to indemnification, obligated URS to defend Montgomery County (including the Commission) in any action or suit arising out of URS's "negligence, errors, acts or omissions" arising under the BOA.  The Contract contained an indemnification provision that did not expressly obligate URS to defend any such claims.  The Contract also provided that, in the event of a conflict among the documents comprising the agreement among the parties, the Contract had precedence over the BOA.

Fort Myer Construction Corporation (the "Subcontractor") was retained to assist in the construction of the bridge.  The Subcontractor filed suit against the Commission claiming damages and delays due to defects in URS's design.  The Commission sent a letter to URS invoking URS's duty-to-defend and indemnification obligations under the basic ordering agreement. URS denied the Commission's demand and refused to defend or indemnify the Commission.  The Commission filed suit against URS for breach of contract and sought indemnification and contribution and URS countersued the Commission for failure to pay URS for work performed under the Contract.

Analysis: After multiple hearings and procedural matters that are not relevant for purposes of this analysis, the Court of Special Appeals (in an unreported opinion) affirmed the lower court's finding that URS had a duty to defend the Commission in the lawsuit brought by the Subcontractor.  The court was not persuaded by URS's argument that the indemnification provisions of the BOA and the Contract were in conflict because "the duty to defend is distinct from, and broader than, the duty to indemnify"; therefore, the duty to defend in the BOA supplemented the indemnification obligations in the Contract.  The Contract's silence regarding any duty to defend did not negate the express language of the BOA.  

The court was also not persuaded by URS's argument that the BOA applied only to the pricing of goods and services because the Contract unambiguously and unqualifiedly stated that the BOA was incorporated into the Contract.  The court found URS breached its agreement with the Commission by refusing to defend the Commission in the lawsuit brought by the Subcontractor, even though the suit was ultimately dismissed for a procedural error committed by the Subcontractor, because the duty to defend was triggered by the Subcontractor filing suit against the Commission regardless of the validity of the Subcontractor's claim.

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

The full opinion is available in pdf.

Thomas v. Cameron Mericle, P.A. (Cir. Ct. Mont. Cnty)

Filed: October 4, 2018

Opinion by: Anne K. Albright

Facts: The following facts are as alleged by the plaintiffs in their complaint and recited in the Circuit Court’s decision.  Two homeowners’ associations (HOAs), through two law firms, separately sought to recover HOA dues from two individuals.  With respect to one individual, suit had been filed in a District Court of Maryland to recover the dues.  The law firm in that action threatened to move forward with trial unless the individual signed a confessed judgment promissory note to settle the matter.  The individual signed the note and made all the payments due under the note; however, the law firm confessed judgment against the individual and filed a complaint for judgment by confession in the District Court.  With respect to the other individual, the law firm threatened to file suit unless the individual signed a confessed judgment promissory note to settle the matter.  The individual signed the note and began making the payments due under the note; however, the law firm confessed judgment against the individual and filed a complaint for judgment by confession in the District Court of Maryland.  In both instances, the confessed judgment note included a clause that appointed an attorney on behalf of the individual, who had authority, without any prior notice to or approval from the individual, to file for entry of a confessed judgment against the individual, in a way that waived the individual’s right to assert a legal defense to any action.  The law firms knew or had reason to know that the HOA dues arose from a consumer transaction or debt.

Based on the facts set forth above, the two individuals filed suit against the law firms, asserting the following six claims: (1) violations of the Maryland Consumer Debt Collection Act (“MCDCA”); (2) negligent misrepresentation; (3) breach of contract; (4) fraud; (5) money had and received; and (6) declaratory judgment.  The plaintiffs subsequently abandoned the breach of contract claim.  The law firms moved to dismiss the five remaining claims for failure to state a claim upon which relief can be granted.  The law firms sought to have all of the claims dismissed with prejudice on the basis of res judicata, arguing that the individuals could have raised defenses to the confessed judgments with the filing of a timely motion in the District Court, and having failed to do so, the individuals were barred from bringing those claims in the Circuit Court action.  Alternatively, the law firms sought to have the claims dismissed on the basis of the facts plead and the merits of the claims.

Analysis/Holding:  The Circuit Court rejected the law firms’ res judicata argument, holding that, because the individuals’ claims were not mandatory counterclaims in the underlying confessed judgment proceedings before the District Court and were not litigated in those proceedings, the individuals were not precluded from asserting the claims in the Circuit Court.  The Court also noted that, even if they had wanted to, the individuals could not have asserted their claims in the confessed judgment proceedings because the claims were either equitable in nature or the amount in controversy exceeded $30,000, such that the claims fell outside the jurisdiction of the District Court.  

Next, the Court discussed the MCDCA claim (Count 1).  The Court noted that “[t]o prove an MCDCA violation, a plaintiff must prove that 1) defendant is a debt collector; 2) defendant’s conduct in attempting to collect a debt was prohibited by the MCDCA [(e.g., to claim, attempt, or threaten to enforce a right with knowledge that the right does not exist)]; and 3) the underlying debt is ‘consumer’ in nature.”  In seeking dismissal of the MCDCA claim, the law firms focused on the first and third elements listed above, arguing that because the debts arose out of confessed judgment promissory notes, which are settlements separate from the underlying consumer transaction, the law firms were not “debt collectors” seeking to collect “consumer” debt.  The Court rejected that argument, holding that “the Law Firms used Confessed Judgment Promissory Notes and then sought confessed judgments.  Because use of those notes and pursuit of those judgments are additional steps the Law Firms allegedly took in order to collect HOA dues, both steps are subject to the MCDCA.”  The Court ultimately dismissed the MCDCA claim on the basis that the plaintiffs failed to allege that the law firms had any actual or constructive knowledge of wrongful conduct, as required under the second element of the claim.  However, the dismissal was without prejudice and with leave to amend the complaint, with the Court noting that a viable MCDCA claim might be asserted if the law firms charged inappropriate “add-on” fees and costs, such as late charges, attorneys’ fees or default interest, with knowledge or reckless disregard of the fact that such add-on fees and costs were not properly chargeable.

The Court then dismissed the negligent misrepresentation claim (Count 2), with prejudice, holding that the plaintiffs failed to allege, and that the Court could not identify, a duty of care owed by the law firms to the individuals.  The Court next dismissed the fraud claim (Count 4) and the money had and received claim (Count 5) because the individuals failed to allege actual facts, rather than general allegations, in support of requisite elements of those claims.  Finally, the Court, having dismissed all of the other claims, held that there was no current actual controversy between the plaintiffs and the law firms, and dismissed the declaratory judgment claim (Count 6).

The full opinion is available in PDF.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

IES Commercial v. Manhattan Torcon A Joint Venture (Maryland U.S.D.C.)

Filed: September 26, 2018

Opinion by: Judge Bennett

Holding:  Subcontractor’s breach of contract claim fails under the “cardinal change” theory because the parties amended the contract and therefore Subcontractor was not “ordered” to perform additional work outside the scope of the original contract.

Facts:  The U.S. Government hired General Contractor to build a biological research facility for the Army at Fort Detrick.  General Contractor hired Subcontractor for the electrical work.  A fire destroyed the building after Subcontractor had performed 92.5% of the work.
 

General Contractor and Subcontractor agreed to a Fire Rider that amended the original contract.  The rider set forth new, additional terms and conditions.  The Subcontractor then performed fire mediation work pursuant to the rider.  However, because the General Contractor was not required under the Fire Rider to pay the Subcontractor until the insurer paid the General Contractor, the General Contractor refused to pay the Subcontractor for a portion of the additional work.  The Subcontractor sued for breach of contract under a cardinal change/quantum meruit and other theories. 

Analysis:  A “cardinal change” occurs in the context of a government contract “when the government demands a contractual alteration ‘so drastic that it effectively requires the contractor to perform duties materially different from those originally bargained for.’”  Hancock Electronics Corp. v. WMATA (4th Cir. 1996).  This theory developed when the government began issuing unilateral contract modifications without seeking the consent from subcontractors and without being in breach of contract.  Crown Coat Front Co. v. US (USSC 1967).  If the unilateral modification exceeds the scope of the contract’s changes clause, then a cardinal change has occurred.  AT&T Comms. v. Wiltel (Fed. Cir. 1993).  Accordingly, a change is cardinal when it cannot be said to have been within the contemplation of the parties when they entered into the contract.  When the government orders a modification that constitutes a cardinal change, the result is a material breach of the contract, which “has the effect of freeing the contractor of its obligations under the contract, including its obligations under the disputes clause.” JJK Grp. v. VW Int’l (D. Md. March 27, 2015).

Here, the Subcontractor asserted that the fire “changed the nature of the Project from new construction to a disaster recovery, restoration, and reconstruction Project,” fundamentally altering the work Subcontractor had contracted to perform for General Contractor under the Subcontract.  However, the parties amended the contract via the Fire Rider, so the government never took unilateral action in altering the contract.  Similarly, the fire itself cannot be considered a cardinal change, nor can the altered work be either.

The full opinion is available PDF.