Clear Channel Outdoor, Inc. v. Director, Department of Finance of Baltimore City (Ct. of Special Appeals, Reported)

Filed: January 29, 2020

Opinion By:  Stuart R. Berger

Holding:  A Baltimore City ordinance that imposes an excise tax on outdoor advertising displays does not violate the right to freedom of speech guaranteed by the First Amendment of the Constitution or Article 40 of the Maryland Constitution.

Facts:  Clear Channel Outdoor, Inc. (“Clear Channel”) owns billboards in Baltimore City that it rents out to third parties.  The third parties pay Clear Channel fees to use the billboards to advertise.  In 2013, Baltimore City signed Ordinance 13-139 (the “Ordinance”) into law, which imposes an excise tax on advertising hosts who (1) own or control a billboard in Baltimore City and (2) charge fees for the billboard’s use as an outdoor advertising display.  The amount of tax (the “Tax”) levied on such advertising hosts depends on the size of the display and whether it is an electronic display.  Baltimore City enacted the Ordinance purely as a revenue-raising measure to lower property tax rates, increase infrastructure investment, and better manage Baltimore City’s pension and retiree healthcare liabilities. 

For the 2014 and 2015 fiscal years, Clear Channel paid the Tax for each year, but in February 2016, demanded a refund of its Tax payments.  When Baltimore City refused to issue a refund, Clear Channel appealed the denial in the Maryland Tax Court, alleging that outdoor advertising is a “constitutionally protected medium of speech under the First and Fourteenth Amendment and Article 40 of the Maryland Declaration of Rights” and that the Tax unconstitutionally restricts that speech.  Clear Channel also argued that heightened scrutiny applied to the Ordinance because the Tax “targeted a small group of speakers on the basis of their participation in such speech.”  Baltimore City argued that the Tax is an excise tax that does not implicate the First Amendment or Article 40 because it is “simply a tax on the privilege to charge fees.”  The Tax Court agreed with Baltimore City and affirmed Baltimore City’s denial of Clear Channel’s refund requests.  The Circuit Court for Baltimore City affirmed the Tax Court’s decision. 

Analysis:  The Court of Special Appeals of Maryland first determined that the Ordinance does not implicate the right to free speech because it is an excise tax that lacks sufficient communicative elements to invoke First Amendment protection.  Classified by the Baltimore City Council as an excise tax, the Tax is imposed on the billboard owners’ ability, or privilege, to charge third parties fees to use the billboards to display the third parties’ messages.  The Tax is only triggered when the billboard owner charges third parties a fee to host the advertisement; it is not triggered by the actual content of the advertisement. 

Because the First Amendment and Article 40 protect speech, including symbolic or expressive conduct, and not the privilege to receive financial compensation for displaying such symbolic or expressive conduct, the Court held that the Ordinance does not violate the First Amendment or Article 40.  Thus, the Court did not apply a heightened scrutiny to the Ordinance and instead analyzed it under a rational basis review.  The Court found that Baltimore City has a legitimate governmental interest in raising revenue, and the Ordinance is rationally related to such interest as the Ordinance does raise revenue for Baltimore City.  The Court accordingly affirmed the circuit court’s judgment and denied Clear Channel’s request for refunds.

The opinion is available in PDF.

Bayou Place Limited Partnership v. Alleppo’s Grill, Inc. (Maryland U.S.D.C.)

Filed: March 13, 2020

Opinion By:  Richard D. Bennett

Holding:  Under Texas law, while Hurricane Harvey has been recognized as an Act of God, Hurricane Harvey is not a legal excuse for failure to perform under a contract when the terms of the contract do not contain a force majeure clause.   

Facts:  Landlord, a Maryland limited partnership, brought suit against tenant, a Texas corporation, alleging continuing violations of a commercial lease agreement governing a property in Houston, Texas.  Tenant began to miss rent payments due under the lease beginning July 2017.  Hurricane Harvey made landfall in Houston in August 2017.  Harvey caused substantial damage to the property and the nearby theater district. 

Landlord provided notices of default from late 2017 through February 2018 and filed its complaint on September 14, 2018.  Tenant admitted receiving notice and failure to pay the entirety of its rent, while asserting several affirmative defenses and requesting declaratory judgement that “they be excused from certain obligations to pay rent due to Acts of God.”  Tenant argued that Hurricane Harvey was an Act of God that caused substantial damage and interference to the property and should excuse Tenant’s performance under the lease.  The Landlord moved for summary judgment. 

Analysis:

The Court applied Texas law to govern the breach of contract claim pursuant to the lease’s choice of law provision.  “An occurrence is caused by an act of God if it is caused directly and exclusively by the violence of nature, without human intervention or cause, and could not have been prevented with reasonable foresight.”  The Court recognized that Texas courts have found Hurricane Harvey to be an Act of God. 

The Court then discussed the interplay between an Act of God and a contract. “[A]n [A]ct of God does not relieve the parties of their [contractual] obligations unless the parties expressly provide otherwise.”  Further, “the scope and applicability of a force majeure clause depend on the terms provided in the contract.” 

“In other words, when the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure.”  The Court summarized, “[i]f the contract does not contain a force majeure clause, ‘Act of God is not a legal excuse for failure to perform.’”  Because the lease did not include a force majeure clause, the Court found that Hurricane Harvey is not a legal excuse for Tenant’s failure to perform the contract.  Further, Tenant began to miss payments prior to Harvey. 

The Court also reviewed the following additional affirmative defenses raised by Tenant:  offset of payments, unconscionability of late fees and frustration of purpose. 

The opinion is available in PDF.

Connaughton v. Day (Cir. Ct. Mont. Co.)

Filed: December 9, 2019

Opinion by: Judge Anne K. Albright

Holding: Plaintiffs alleging securities fraud were denied class certification because, despite demonstrating commonality of questions of law and fact, they failed to show that joinder of approximately 35 putative claimants was impracticable or that their claims were typical or their representation adequate, given the variety in the source, nature of and reliance on information received by the plaintiffs and putative class members.

Facts: The four Original Defendants were individuals and entities accused of procuring investors for a Ponzi scheme run by three non-parties, the MLJ Group. The second amended complaint named 14 New Defendants and additional related claims.

Plaintiff’s Amended Motion for Class Certification requested certification of a class of all persons who invested in securities, in the form of promissory notes, by lending money to borrowers of the MLJ Group. The requested class excluded individuals who profited off the Ponzi scheme and those affiliated with any Defendant.

The Amended Motion was served via counsel on the Original Defendants, but there were no Affidavits of Service for the New Defendants. The Original Defendants responded to the Amended Motion and participated in prior discovery; the New Defendants did not do either.

Analysis: The Court held that the Amended Motion did not meet the threshold requirements of Maryland Rule 2-231(b). As to the first numerosity requirement, the Court accepted an Original Defendant’s estimate that the putative class would be made up of 35 members, and the Plaintiffs provided only conclusory arguments for why joinder would be impracticable. As to second requirement of commonality, the Court was satisfied that Plaintiffs identified seven common questions of law and fact.  

As for the third typicality requirement, some Plaintiffs were contacted regarding the transaction by a non-party accountant rather than a Defendant. Other putative class members contacted by the Defendants themselves did not receive scripted, uniform information. The variety in the sources of information, the information received, and the reliance on the information makes the Plaintiffs’ claims less typical.

As for the fourth adequacy requirement, because the Plaintiffs may have relied on statements of the non-party accountant rather than a Defendant, the named Plaintiffs cannot adequately represent the putative class. Additionally, the accountant is both a potential target of claims and putative class member. Thus, only one of the four threshold requirements of Maryland Rule 231(b) was met.

The Plaintiffs also failed to meet the requirements of Maryland Rule 2-231(c)(3). As for the predominance requirement, fraud claims are not normally susceptible to class treatment because there could be too much variety regarding the degree of reliance placed on representations. This appears to be case here given the role of the non-party accountant and the receipt of unscripted information, as discussed above. As for the superiority of class action requirement, considering the pre-set trial schedule, the fact that the New Defendants were not given a chance to address these questions, and that more time would not cure the other failings of the Amended Motion, Plaintiff’s argument fails.

Thus, Plaintiffs’ Amended Motion for Class Certification was denied.

The full opinion is available in PDF.

Transamerica Premier Life Ins. Co. v. Selman & Co., LLC (Maryland U.S.D.C.)

Filed: July 9, 2019

Opinion by: Ellen L. Hollander

Holding:

The United States District Court for the District of Maryland denied a motion for failure to state a claim for (1) breach of contract, in light of ambiguous extrinsic evidence of intent to create a novation, and (2) unjust enrichment, where the existence of a contract governing the subject matter was in dispute.

Facts:

Plaintiff (“Insurer”) underwrote insurance products brokered and administrated by Defendant (“Agent”). Agent and Insurer’s business relationship eventually came to include products called TRICARE Supplements: voluntary plans offered to members of the military and their families that covered the various out-of-pocket costs not covered by the government-provided TRICARE health insurance program.

As Insurer and Agent transacted their insurance business together, three relevant sets of contracts came into being: one from 2002 (the “Original”), two acquired by assignment in 2014 (the “Acquired”), and a 2016 amendment to the 2002 agreement (the “Amendment”).

Under the 2002 Original agreement, Agent would administer and manage certain life and health insurance products, but the Original agreement’s language did not contemplate TRICARE supplement policies and lacked an exclusivity clause.

Pursuant to the 2014 Acquired agreement, Agent began to market, sell, and administer TRICARE Supplement policies in consideration of a portion of the premiums collected on those policies. In order to help Agent meet its contractual obligations, Insurer provided significant confidential and proprietary information (such as customer leads, records, risk analysis, performance results, and other non-public data). Agent and Insurer agreed to a confidentiality clause in order to protect this information, and to a narrow exclusivity clause with regard to the TRICARE Supplement policies marketed toward employers. An at-will termination clause allowed either party to terminate the Acquired agreement with 180 days' notice.

The 2016 Amendment reaffirmed the Original agreement but replaced the original fee schedule with a revised one that included the TRICARE accounts Agent had taken on since 2014. Two years passed.

In a November 2018 meeting, an Agent executive informed an Insurer executive about Agent's intent to move its TRICARE Supplement policies to one of Insurer’s competitors on January 1, 2019. Agent’s executive acknowledged the existence and enforceability of the exclusivity clause but implied that the provision only served to limit Insurer’s rights to underwrite coverage – not to limit Agent’s rights to move its business elsewhere.

Insurer promptly requested Agent cease and desist taking actions to transfer the policies, but Agent failed to comply. Insurer brought suit, alleging breach of contract (of the exclusivity and confidentiality clauses), anticipatory breach of contract (for failure to adhere to the 180-day notice requirement), and unjust enrichment (for taking Insurer’s data, services, and commission payments without consideration).

Agent moved to dismiss for failure to state a claim.

Analysis:

The court began by noting that in order to survive a Rule 12(b)(6) motion, the complaint must contain facts sufficient to state a claim to relief that is plausible at face value. Sufficiency required more than bald accusation or mere speculation, but less than detailed factual allegations: enough to suggest a cause of action even if the actual proof was improbable or recovery was unlikely. Accordingly, the court indicated the authenticity and import of the contract documents at issue and noted it would consider them at the 12(b)(6) complaint stage.

The court next evaluated whether the 2016 Amendment constituted a novation. If so, it would supersede the terms of the earlier Original and Acquired agreements, eliminating any language about exclusivity or confidentiality and mooting Insurer’s claims for breach of contract.

A novation forms a new contractual relationship and requires four elements: (1) a previous valid obligation, (2) agreement of the parties to the new contract, (3) validity of the new contract, and (4) the extinguishment of the old contract by substitution.

The court was ultimately unpersuaded that the parties had intended a novation because the contract text failed to clearly establish the parties’ intent to extinguish the 2002 Original and 2014 Acquired documents with the 2016 Amendment. The court considered the parties’ conflicting and ambiguous extrinsic evidence about their motivations for the 2016 Amendment to indicate lack of the requisite clear intent. In a light most favorable to Agent, the extrinsic evidence suggested an intent to keep separate and in force certain terms. Due to the conflicting extrinsic evidence, the court considered it premature (at the 12(b)(6) stage) to conclude that a novation could have occurred. Because the court declined to find a novation at this stage, Insurer had clearly stated a viable claim for breach of contract. The court separately noted that although Insurer had established sufficiency for its anticipatory breach claim, it would construe the count as one for breach of contract because the “anticipatory” relationship to January 1, 2019 had expired.

Finally, the court evaluated the unjust enrichment claim, explaining the general rule that no quasi-contractual claim for relief could arise where an actual contract existed. But a plaintiff is not barred from pleading such a theory in the alternative where existence of a contract was in dispute. At the 12(b)(6) stage, the court found it premature to conclude that one or the other or no contract language might govern the claim at issue. Accordingly, Insurer had met its burden of sufficiency for a claim of unjust enrichment.

The court denied Agent’s motion to dismiss in its entirety.

The full opinion is available in PDF.

Credible Behavioral Health, Inc. v. Johnson (Ct. of Appeals)

Filed: November 20, 2019

Opinion by: Judge Clayton Greene Jr.

Holding: On appeal, the circuit court must review the district court’s factual determinations for clear error and legal conclusions de novo.  Pursuant to a valid promissory note, an obligation to repay an employer-provided tuition loan exists whether the employee is fired or quits.

Facts:

Petitioner (“Employer”) offered a tuition loan program to its employees in an effort to both cultivate professional development and incentivize employee retention. Under this program, Employer agreed to provide tuition payments toward undergraduate, graduate, or post-graduate programs in the form of a loan to the participating employee. Upon completing their study, the employee might have to repay Employer the full cost, some percentage, or enjoy loan forgiveness depending on how long they remained at the company.

Respondent (“Borrower”) was in the service of Employer in 2016 and entered into its tuition loan program that year. Borrower signed an unsecured promissory note which stated in relevant part:

1. Principal Repayment: (a) The principal balance of the Loan plus all accrued interest thereon shall be due and payable in accordance with the following schedule:

(i) If you terminate employment with the Company within 12 months following achievement of the degree, 100% of the loan;
(ii) If you terminate employment with the Company after the 12 month anniversary but on or before the 24 month anniversary following achievement of the degree, 75% of the Loan;
(iii) If you terminate employment with the Company after the 24 month anniversary but on or before the 36 month anniversary following achievement of the degree, 50% of the Loan;
(iv) If you terminate employment with the Company after the 36 month anniversary following achievement of the degree, 0% of the Loan;

The appropriate percentage of the Loan… shall be due and payable 90 calendar days after the termination of your employment, whether by you or the Company, for any or for no reason whatsoever…

Employer loaned Borrower $12,529 under the tuition loan program, but terminated him in December 2017. At that time, Borrower had not yet acquired his degree. Employer and Borrower entered into a repayment plan under which Borrower made one payment in February 2018 and no further payments.

Employer’s attorneys issued a demand letter in April 2018 for full payment of the loan balance by May 2018. Receiving no subsequent payments, in June 2018 Employer sued Borrower in the District Court of Maryland sitting in Montgomery County.

The court found in Borrower’s favor, reasoning that the amounts under the repayment plan only became due if Borrower quit because the provisions within 1(a) were inconsistent: subsections 1(a)(i)-(iv) applied where an employee quit while the paragraph following applied where an employee was terminated. Without a basis to determine how much Borrower owed, the trial judge found the inconsistency should go against the party who drafted the contract.

On appeal, the Circuit Court for Montgomery County found the lower court not clearly erroneous in its interpretation and affirmed the judgment.

Employer subsequently sought and received a writ of certiorari.

Analysis:

Three questions lay before the court: (1) whether the appellate court correctly applied Md. Rule 7-113(f) when it reviewed the trial court’s contract construction for clear error rather than de novo, and (2) whether the plain terms of the contract entitled Employer to a judgment against Borrower, and (3) whether Maryland law required the appellate court to choose one of two possible readings of the contract consistent with the parties’ intent.

The court began by referencing both statute (Md. Rule 8-131(c)) and case law (Friendly Finance v. Orbit, 378 Md. 337, 342-43 (2003)) to delineate the standards of review under Md. Rule 7-113(f): judgments of a bench trial court on the evidence should not be set aside unless clearly erroneous, but the trial court’s conclusion, interpretation, or application of law must be reviewed de novo.

Contract interpretation is a clear example of a legal determination and therefore subject to de novo review. Therefore the appellate court improperly applied Md. Rule 7-113(f) in failing to review the trial court’s promissory note interpretation anew.

Accordingly, the court began a de novo review. The basic dispute centered about whether an obligation to repay existed depending on whether an employee was fired or had quit. The court found the language of 1(a) to have two contrary interpretations: an obligation to repay in both situations (fired or quits), or an obligation to repay only where the employee quits.

Examining the promissory note’s text, the court inquired into the intent of the parties by determining from the language of the agreement what a reasonable person would have meant at the time. The promissory note’s preamble communicated that “…[Borrower] unconditionally promises to pay…the aggregate principal…with all accrued and unpaid interest thereon.” The paragraph following 1(a) also clearly constituted an obligation to repay the loan: “The appropriate percentage of the Loan set forth above, plus all accrued interest thereon shall be due and payable (i) ninety (90) calendar days after the termination of your employment, whether by you or the Company, for any or for no reason whatsoever…” The subsections 1(a)(i-iv) merely determined the amount owed based on the employee’s tenure after attaining his degree.

Finding the conditions of 1(a) meaningful although awkwardly worded, the court could see no substantive indication that the amount owed should become due only where an employee unilaterally ended his employment. Because both parties had stipulated to the promissory note’s clarity (lack of ambiguity), the court declined to construe its terms against the drafter.

Finally, the court reminded that Maryland courts consistently strive to interpret contracts in accordance with common sense, and that the lower courts’ interpretation ran contrary to common sense because of the resulting disparate treatment of employees based on whether they were fired or voluntarily quit. In the nonsensical construction, a fired employee received loan forgiveness while the employee who quit kept his obligation. If this construction controlled, an employee who wanted to leave Employer and shirk his promissory note obligation could simply act in a manner that would compel the company to fire him.

Reversing the appellate court’s decision, the court determined its interpretation – that the parties intended the tuition loan to be repaid regardless of whether the employee quit or was fired – to be reasonable, in accord with a common sense approach, and with an effect of harmonizing the substance of the various sections of the promissory note.

The full opinion is available in PDF.

Under Armour, Inc. v. Battle Fashions, Inc. (Maryland U.S.D.C.)

Filed: July 18, 2019

Opinion by: Richard D. Bennett

Summary: Under Armour, Inc. (“Under Armour”) filed a lawsuit seeking, among other things, a declaration that its use of certain phrases in connection with its products does not infringe upon a registered trademark owned by defendant Kelsey Battle (“Battle”).  Battle, a resident of North Carolina, moved to dismiss the action for lack of personal jurisdiction.  After holding an evidentiary hearing, the court dismissed the action for lack of personal jurisdiction and transferred the matter to the Eastern District of North Carolina.

Analysis:  The court initially denied Battle’s motion to dismiss, holding that the requisite preliminary prima facie showing of personal jurisdiction had been made.  However, after holding a pre-trial evidentiary hearing, the court found that personal jurisdiction over Battle had not been established by the requisite preponderance of the evidence.  The court began its analysis of personal jurisdiction by noting that two conditions must be satisfied in order to exercise personal jurisdiction over a non-resident: (1) the exercise of jurisdiction must be authorized under Maryland’s long-arm statute [Md. Code Ann., Cts. & Jud. Procs. § 6-103(b)]; and (2) the exercise of jurisdiction must comport with the due process requirements of the Fourteenth Amendment of the Constitution.  As to that two-pronged analysis, the court noted that Maryland courts “have consistently held that the state’s long-arm statute is coextensive with the limits of personal jurisdiction set out by the Due Process Clause of the Constitution,” but that courts must address both prongs of the analyses.

As to the first prong of the analysis, the court noted that “a plaintiff must specifically identify a provision in the Maryland long-arm statute that authorizes jurisdiction”.  Here, Under Armour argued the existence of personal jurisdiction over Battle based on his transacting business in Maryland [Md. Code Ann., Cts. & Jud. Procs. § 6-103(b)(1)].  Noting that “Maryland courts have construed the phrase ‘transacting business’ narrowly, requiring, for example, significant negotiations or intentional advertising and selling in the forum state”, the court found that a small number of sales by Battle to Maryland consumers, two cease and desist letters sent by Battle to Under Armour in Maryland, and three letters sent by Battle to parties outside of Maryland in order to “put pressure” on Under Armour were insufficient to establish personal jurisdiction under Maryland’s long-arm statute.

As to the second prong of the personal jurisdiction analysis, the court noted that the Fourteenth Amendment requires that a defendant have certain minimum contacts with the jurisdiction “such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.”  Acknowledging that there was no basis to assert “general” or “all-purpose” jurisdiction over Battle, the court focused its analysis on “specific” jurisdiction, which requires that the action “arise out of or relate to the defendant’s contracts with the forum.”  Here, the controversy did not relate to marketing or selling infringing products in the forum but instead related to the activities of Battle in enforcing his trademark.  Accordingly, the court’s analysis focused on whether the two cease and desist letters sent to Maryland and the three letters sent to parties outside of Maryland were sufficient to establish specific jurisdiction over Battle in Maryland.  As to the letters sent to Under Armour in Maryland, the court held that “cease-and-desist letters alone are insufficient to confer specific personal jurisdiction.”  The court then noted that “enforcement activities taking place outside the forum state do not give rise to personal jurisdiction in the forum.”  Based on that premise, the court held that the three letters sent to parties outside of Maryland did not give rise to personal jurisdiction over Battle because those letters “did not threaten litigation, had no effect on Under Armour’s business, and did not result in any damage to Under Armour’s business relationships.”

The full opinion is available in PDF.

ConAgra Foods RDM v. Comptroller

ConAgra Foods RDM v. Comptroller (Ct. of Special Appeals)

Filed: June 27, 2019

Opinion by: Judges Woodward, Arthur and Leahy

Holding:

Foreign intellectual property holding company subsidiaries of corporations doing business in Maryland have no economic substance and are taxable separately from the parent.

Facts:

ConAgra is a processed food conglomerate that sold products in Maryland from 1996 through 2003, filed tax returns in Maryland and paid income tax.  One of its subsidiaries, Brands, was formed for the sole purpose of serving as an intellectual property holding company.  Brands licensed the trademarks to ConAgra and received royalties, and paid royalties back to the parent.

In 2007, the Comptroller of Maryland issued a Notice and Demand to File Maryland Corporation Income Tax Returns for 1996 through 2003 as well as a Notice of Assessment totaling $2,768,588 in back taxes, interest and penalties.  The Maryland Tax Court upheld the Comptroller’s assessment because Brands lacked “economic substance” as a separate business entity, which satisfied the U.S. Constitution requirements of “minimum contacts” and “nexus”. 

Analysis:

To meet U.S. Constitutional standards, the government’s tax collection procedures must provide taxpayers with “fair warning” to satisfy the Due Process Clause of the U.S. Constitution.  Under the Mobil Oil standard there must be a minimal connection between the interstate activities and the taxing State, and a rational relationship between the income attributed to the State and the intrastate values of the enterprise.  Mobil Oil Corp. v. Comm’r of Taxes of Vermont, 445 U.S. 425 (1980).  The Commerce Clause is designed to prevent States from engaging in economic discrimination, and requires that a tax (1) apply to an activity with a substantial nexus with the taxing State, (2) be fairly apportioned, (3) not discriminate against interstate commerce, and (4) be fairly related to the services the State provides.  Philadelphia v. New Jersey, 437 U.S. 617.

These criteria have been implemented by the Court of Special Appeals in several cases, and the Court agreed with the Maryland Tax Court in this case after reviewing the standards from Gore Enter. Holdings, Inc. v. Comptroller, 437 Md. 492 (2013) and Comptroller v. SYL, Inc., 375 Md. 78 (2003) as well as Comptroller v. Armco Exp. Sales Corp., 82 Md. App. 429 (1990).  In Gore, Gore assigned all of its patents and certain other assets to the wholly owned subsidiary in exchange for the subsidiary’s entire stock.  The four factors in Gore that helped the Court determine if the wholly owned foreign subsidiary lacked economic substance and was consequently subject to income tax in Maryland were:  1. How dependent the subsidiary is on the parent for its income; 2. Whether there is a circular flow of money between the two companies; 3. How much the subsidiary relies on the parent for its core functions and services;  4. Whether the subsidiary engages in substantive activity that is in any meaningful way separate from the parent.  Also, in SYL, the Court of Appeals adopted the Armco reasoning and found that sheltering income from state taxation was the predominant reason for the creation of SYL.

Here, Brands was dependent on ConAgra for the “vast majority” of its income, there was a circular flow of money between the companies, Brands relied on the parent for its core functions, and it did not have any meaningful substantive activity separate from ConAgra.

Separately, the Court also approved the State’s blended apportionment formula to determine Brands’ taxable income as an altered formula is permitted by Tax General Article 10-402(d) to clearly reflect income.  Here, the popular 3-factor apportionment formula based on property, payroll and sales would have yielded an apportionment factor of zero.  The blended formula accounted for ConAgra taking deductions for the royalty expenses.

The full opinion is available PDF.

Mas Associates, LLC, et al. v. Harry S. Korotki (Ct. of Appeals)

Filed: August 8, 2019

Opinion by: J. Adkins

Holding: The evidence cannot sustain the simultaneous intent to form both an LLC and a partnership where the parties engaged in negotiations to become members of an existing LLC and never abandoned that intention; they governed the entity and made capital contributions to it consistent with the terms of the existing LLC operating agreement; and in the interim period before becoming members, they agreed to be employees rather than partners, and treated payments made to them as salary rather than shared profits.

Facts:

In 2009, Appellee and two defendants, one of whom was a member of the Appellant LLC, began discussing the possibility of merging their companies to increase profitability. The parties held discussions about what form the merger would take and eventually agreed to dissolve the other companies and join the Appellant LLC.

The parties agreed during a business planning meeting that the parties should own Appellant LLC at approximately a third each (plus a minority) and, to achieve this, planned a transfer of interests under the Appellant LLC's existing 2004 operating agreement. They also agreed during the meeting to divide their affairs into an interim and post-interim period. During the interim period, the parties agreed that they would be employees who would receive compensation equal to one-third of the profits. Appellee and the non-owner defendant would also liquidate their companies and surrender their licenses. The parties' attorneys circulated a draft interim agreement and a draft operating agreement, which were extensively negotiated but never signed. For years, the parties engaged in the business and eventually began turning a profit. Other relevant details are discussed in the analysis section.

In 2011, Appellee resigned from his position and attempted to negotiate his departure. The defendants refused to meet with him, and Appellee filed a claim in the Circuit Court for Baltimore County. Among other claims, he pleaded for a determination of the buyout price of his partnership interest. The trial court found in favor of Appellee on all but one of his claims. The trial court found that a partnership had existed because the parties made management decisions together and contributed money equally during the course of the business and awarded damages accordingly. The question presented here is whether competent material evidence exists in the record to support the trial court’s conclusion that the parties intended to form a partnership.

Analysis:

In Ramone v. Lang, No. Civ.A. 1592-N, 2006 WL 905347 (Del. Ch. Apr. 3, 2006), the Ramone court held that there was no partnership between two parties who had discussed buying a swimming center by forming an LLC. When negotiations failed, and one party went on to form an LLC with other individuals, the other party claimed they had formed a partnership in the course of their negotiations. The Ramone court held that the failure to form an LLC without more did not make them partners given the reality that they had never agreed on their obligations to one another.

The Court also cited other case law and sources for the proposition that “it would be inequitable to construe arms-length negotiations between sophisticated parties to form an LLC concurrently as intent to form a partnership when those negotiations fail.” See Grunstein v. Silva, C.A. No. 3932-VCN, 2011 WL 378782 (Del. Ch. Jan. 31, 2011); Christine Hurt, D. Gordon Smith, Alan R. Bromberg & Larry E. Ribstein, on Partnership sec. 204[B]; and Garner v. Garner, 31 Md. App. 641 (1976). The Court concluded that these principles are applicable here.

Here, the parties’ initial goal, which remained consistent throughout the negotiations, was to each obtain a membership interest in the Appellant LLC. To govern their relations until they could reach that goal, the parties entered an interim agreement whereby they would be employees and not partners. Critically, the parties never abandoned their efforts to become members of the Appellant LLC.

As for other factors that courts commonly look toward to evaluate partnership intent, the Court also found in favor of the Appellants. In terms of the management and control factor, the Court held that the parties were acting in accordance with the terms of the existing 2004 operating agreement and that their joint decision-making is consistent with the typical duties of an LLC manager. Also, casual use of the word “partner” is not determinative, particularly when the parties did business under the registered tradename of the Appellant LLC.

As for the capital contributions factor, the parties made payments first to another member of the Appellant LLC who then transferred them to the Appellant LLC because such was the procedure demanded under the existing 2004 operating agreement. Such elaborate steps would have been unnecessary if the parties intended to contribute to a partnership. Finally, the Revised Uniform Partnership Act prohibits blurring the lines between partnerships and other entities. To treat the contribution to an LLC as a contribution to a partnership would be to treat the entities as one in the same in contravention of the express terms of the law.

As for the sharing of profits and losses factor, the Court cited Ingram v. Deere, 288 S.W.3d 898-99 in support of the contention that salary can be a share of gross revenue. Here, the payments to the parties were denoted as salary on the payroll journal, their wages were calculated on W-2 forms--which included typical wage withholdings--they reported wages on their Form 1040 tax returns, and no one filed a K-1 schedule reporting profits. The business paperwork also reflected their titles as managers and officers. Also, Appellee never intended to be equally liable for the debts of the alleged partnership, as evidenced by his unwillingness to be held jointly and severally liable for loans or execute any indemnity agreements to that effect.

As a result, the Court of Appeals reversed the lower court, determining that the trial court was clearly erroneous in finding an intention to form a partnership by the parties to the litigation.

The full opinion is available in PDF.

Gables Construction v. Red Coats

Gables Construction v. Red Coats (Ct. of Special Appeals)

Filed: February 27, 2019

Opinion by: Judge Alexander Wright.

Holding:

Contractual waivers of subrogation do not shield a contracting party from third-party contribution and direct liability under the Maryland’s Uniform Contribution Among Joint Tort-Feasors Act (“UCATA”)

Facts:

Upper Rock was the owner of a residential building project and hired Plaintiff Gables Construction (“GCI”) as the General Contractor, wholly owned by Gables Residential Services, Inc. (“GRSI”), to build the building. GSRI hired Defendant Red Coats, Inc./Admiral (“Red Coats”) to provide security and fire watch services monitoring during the construction period from approximately 5 pm to 6 am pursuant to a vendor services agreement (the “VSA”).  In the GSRI-Red Coats VSA, Red Coats waived subrogation; also, GCI is named as an additional insured in the VSA.

A fire damaged a building as it was almost completed.  The fire may have been caused by space heaters.  Upper Rock sued Defendant, and they settled.  Defendant then sued Plaintiff, claiming it was liable because it provided no training on the operation of the space heaters to Defendant.

Analysis:

The Court of Special Appeals agreed with the Montgomery County Circuit Court that Red Coats’ settlement with Upper Rock does not preclude Red Coats from seeking contribution from GCI under Maryland’s UCATA.

Citing Homeseekers’ Realty v. Silent Automatic Sales, 163 Md. 541, 545 (1933), a “contract is binding only upon the parties to the contract and their privies.”  

Before Maryland enacted its UCATA in 1941, “a statutory right of contribution among joint tortfeasors….did not exist.”  See Central GMC v. Helms, 303 Md. 266, 276(1985).  Thus, injured parties cherry-picked which tortfeasor to sue.

UCATA provides that a release of one joint tortfeasor does not relieve the liability of other joint tortfeasors.  If it did, it could create a chilling effect on business relationships.

The full opinion is available PDF.

Smith v. Wakefield, LP (Ct. of Appeals)

Filed:  February 27, 2019

Opinion by:  Judge Robert N. McDonald

Holding:  Action for back rent under a residential lease is subject to a three-year statute of limitations irrespective of whether the parties purport to convert the lease into a contract under seal.  The three-year statute of limitations governing residential leases is not subject to waiver.

Facts:  

Petitioner (“Tenant”) in 2007 entered into a month-to-month lease for an apartment in Baltimore City owned by respondent (“Landlord”).  The lease consisted of a one-page cover page and seven pages comprising 90 numbered terms and conditions.  Among those provisions was the following sentence: 

STATUTE OF LIMITATIONS: This lease is under seal and is subject to the twelve-year limitation period of Section 5-102 of the Courts and Judicial Proceedings Article of the Annotated Code of Maryland.

Tenant vacated after a few months and ceased to pay rent though the parties dispute whether Tenant vacated voluntarily after giving notice or had been evicted.

Nearly eight years later, Landlord sued Tenant to recover unpaid rent, arguing that CJ §5-101’s three-year period of limitations did not apply to a “contract under seal.”  The District Court of Baltimore City agreed and found in Landlord’s favor.  On appeal, the Circuit Court for Baltimore City affirmed.  Tenant thereafter petitioned for and was granted certiorari.

Analysis:

First, the Court set out the two relevant statutes prescribing statutes of limitation for civil actions: CJ § 5-101 providing the three-year limit for the majority of civil actions and CJ § 5-102 outlining the twelve-year limit for “specialities” such as instruments under seal, bonds, or judgments.

In Tipton v. Partner’s Management Co., the Maryland Court of Appeals had evaluated the merits of a similar action; there, a landlord had sued to collect back rent after failing to take legal action for seven years.  The Tipton Court exhaustively researched the legislative history of CJ § 5-101 and CJ § 5-102, determining that Maryland had applied the three-year period of limitations since colonial times, even though leases and conveyances of real property had customarily been executed “under seal.”  Maryland’s legislature had seen fit not to place residential leases among the “specialties” carved out from the general three-year limit when it revised the code and created CJ § 5-101.   Tipton held that a mere seal affixed to a lease would not waive the three-year period of limitations.  The Tipton Court, however, did not reach the threshold questions of the instant case: would a clear and explicit waiver of the three-year statutory period of limitations conflict with Maryland landlord-tenant law?

Landlord argued that Tipton’s holding left room for parties to agree to modify the limitation period.  The Court responded shrewdly: had anything changed so markedly in the five decades since the last code revision that supported quadrupling the period of limitations on an action for back rent to 12 years?  The 1970s legislature not only revised the Courts and Judicial Proceedings articles, but also the Real Property articles (e.g. attempting to eliminate the custom of executing leases under seal) and Landlord-Tenant law (e.g. attempting to neutralize the superior bargaining power of landlords).   Landlord’s last bastion was an attempt to point to more recent developments.

So looking, the Court turned its focus to Ceccone v. Carroll Home Services, LLC, decided in 2017.  The Ceccone Court held that parties could modify a statute of limitations that might otherwise apply to a cause of action provided that (1) there existed no controlling statute to the contrary, (2) the modification was reasonable, and (3) the modification was not subject to other defenses such as fraud, duress, or misrepresentation.  Finding some ambiguity in the application of the first element to RP § 8-208(d)(2)’s requirement that a lease be proscribed from waiving or foregoing any right or remedy provided by applicable law, the Court found more clarity in element two.  Ceccone’s framework for evaluating the reasonableness of a modification included the following factors: the length of the modified period of limitations, its relation to the statutory period, the relative bargaining power of the parties, the subject-matter of the contract, and whether the modification was one-sided in its effect.  

Applying this framework, the Court found the factors to lean in Tenant’s favor.  Government agencies would not have retained records for so long as twelve years, the lease terms and format argued against an arms-length bargaining process, and the Court could find no potential action that a tenant might reasonably bring under a lease a decade or more after its termination making the waiver one-sided in its application.  In the Court’s view, a nine-year extension of the time to bring an action for back rent did not constitute a reasonable modification of the statute of limitations.

The Court therefore found the three-year period of limitations (1) to apply to actions for back rent under residential leases regardless of language purporting to convert the lease to a contract under seal, and (2) not subject to waiver.

Two judges wrote in dissent, noting that the Maryland legislature in 2014 excepted from the twelve-year period of limitations certain instruments such as deeds of trust, mortgage, and promissory notes signed under seal, but did not include residential leases in that legislation.  Bills in 2016 and 2017 to craft such an exception failed, indicating legislative intent to militate precisely against the court’s majority reasoning.

The dissent further noted that statutes of limitation operate as procedural mechanisms rather than rights or remedies, meaning RP § 8-208(d)(2) should not limit a lease’s modification of the three-year general statute of limitations.

The full opinion is available in PDF.