Court Declines to Impute Minimum Contacts of Subsidiary to Parent Corporation under Maryland Long Arm Statute in National Fire & Marine Ins. Co. v. Advanced Lighting Technologies, LLC (U.S.D.C. Md.)

Filed: September 20, 2023

 

Opinion by: J. Rubin

 

Holding: the Court held that the relationship between the subsidiary and parent corporation, which included filing consolidated tax returns, having the same directors elected to both boards, and a trademark license issued by the parent to the subsidiary, was insufficient to establish personal jurisdiction over the parent corporation under Maryland’s long-arm statute.

Facts: The Plaintiff, National Fire & Marine Insurance Company, as subrogee of Manticorp LLC, brought this action following a fire at a commercial property leased by Manticorp. The Plaintiff alleged that the fire was caused by defective lighting products supplied by Advanced Lighting and Venture Lighting International Inc., which are associated entities. The complaint set forth various counts including Products Liability, Negligence, and Breach of Implied Warranties.

Advanced Lighting, however, contested the court's personal jurisdiction over it, citing insufficient minimum contacts with the State of Maryland. Following limited discovery on the matter, Judge Rubin concluded that the Plaintiff failed to establish grounds for jurisdiction under Maryland's long-arm statute. The court found that National Fire's allegations, even if true, were insufficient to impute Venture Lighting's Maryland contacts to Advanced Lighting for jurisdictional purposes.

Plaintiff had alleged that Advanced Lighting should be treated as the alter ego of its subsidiary, Venture Lighting, because: (1) Venture Lighting is a wholly owned subsidiary of Advanced Lighting; (2) Venture Lighting and Advanced Lighting have common ownership; (3) Advanced Lighting sets sales and earning goals for Venture Lighting; (4) Advanced Lighting consolidates financial statements and submits a single tax return for itself and its subsidiaries; and (5) Advanced Lighting does not have formal arrangements with Venture Lighting.

Analysis:

 

The Court began its analysis with the Maryland long-arm statute, which provides authority for a Maryland-based court to exercise jurisdiction over a non-resident defendant that directly conducts activities, such as providing services, selling goods, or causes tortious injury, in Maryland, or does so through an agent. Md. Code Ann. Cts. & Jud. Proc. §§ 6-103; Mylan Labs, Inc. v. Akzo, N.V., 2 F.3d  56 (4^th cir. 1993). The plaintiff alleged that Advanced Lighting could be imputed the minimum contacts of its subsidiary, Venture Lighting International Inc., essentially arguing that the subsidiary was an “alter ego” of the parent corporation for purposes of the long arm statute.

 

The Court next examined Mylan Laboratories case that establishes that under Maryland law, a parent corporation can be treated as an alter ego of a subsidiary under the “agency” test, if the parent corporation “exerts considerable control over the activities of the subsidiary.” The Mylan court discussed several factors in determining whether the parent exercises such control, such as whether significant decisions of the subsidiary must be approved by the parent, whether the two have separate books and records, employ separate accounting procedures, and hold separate directors’ meetings, along with the level of interdependence of the two corporations, and whether the parent corporation knew or should have known that its conduct would have some impact in Maryland. Mylan Labs, Inc., 2. F.3d at 61-62.

 

In the present case, the Court concluded that the parent could not be treated as the alter ego of its subsidiary, reasoning that on balance, the evidence adduced by the parties did not suggest that Advanced Lighting exerts considerable control over the subsidiary corporation, or that Venture Lighting’s significant decisions are subject to the parent’s approval. The Court reasoned that filing consolidated tax returns, being a 100% owned subsidiary where both boards are comprised of the same directors, and having a trademark license issued by the parent to the subsidiary for a product sold by the subsidiary was insufficient to impute the contacts with Maryland of the subsidiary to the parent for purposes of personal jurisdiction.

 

As a result, the Court granted Advanced Lighting’s motion to dismiss for lack of personal jurisdiction.

 

Full opinion here.

Stricken Permissive Counter Claims Not Barred by Doctrine of Res Judicata under Summers v. Beltway Builders, Inc. (App. Ct. of Md.)

 

Filed: February 7, 2023

Opinion by: Friedman, J.

Holding: A dismissed permissive counter-claim cannot be barred by the doctrine of res judicata when subsequently filed by the former defendant in a subsequent lawsuit against the former plaintiff.

Facts: The dispute originated when homeowners James Summers and Dr. Steven Snyder contracted Beltway Builders, Inc. for home remodeling. A disagreement arose over the performance, leading Beltway to sue for breach of contract and unjust enrichment, while the homeowners filed a late counterclaim for breach of contract. Beltway then filed a motion to strike the counterclaim. The homeowners, therefore, filed the instant, separate suit against Beltway. The homeowners prevailed in the original lawsuit filed by Beltway, and Beltway defended the subsequent lawsuit on the grounds of res judicata.

Analysis: The doctrine of res judicata bars re-litigating civil claims after such claims have had their day in court and a final judgment on the merits has been entered by the court. Under Maryland law, the elements of res judicata are: (1) that the parties in the present litigation are the same or are in privity with the parties to the earlier litigation; (2) that the claim presented in the current action is identical to the one determined or which could have been brought in the prior litigation; and (3) that there was a final judgment on the merits in the prior litigation. Spangler v. McQuitty, 449 Md. 33, 65 (2016). Under Rowland, however, courts will not find that a party's claims are barred by res judicata when that party still has the right to bring them as an independent suit. Rowland, 320 Md. at 232-33.

The circuit court had dismissed the homeowners' separate lawsuit, filed later, based on the doctrine of res judicata, deciding that the homeowners should have initially brought their claims as counterclaims in Beltway's lawsuit. However, the Appellate Court held that under Maryland Rule 2-331(a), counterclaims are permissive, not mandatory. Citing Rowland v. Harrison and other sources, the court underscored that Maryland law does not force defending parties into a 'use it or lose it' situation regarding counterclaims.

Consequently, the appellate court found that the lower court's dismissal based on res judicata was erroneous, as it conflicted with the flexible nature of Maryland’s counterclaim rules. The judgment was reversed, and the case was remanded.

For the full opinion, please refer to the PDF document linked here.

 

Tim Faith is a practicing business law and estates planning attorney, and also an associate professor at The Community College of Baltimore County, where he teaches business law, legal writing, and torts.

 

Tim also serves as the chair of the Maryland Business Law Developments blog, a service of the Business Law Section of the MSBA.

 

Tapestry, Inc. v. Factory Mutual Insurance Company (Supreme Court of Maryland)

 Tapestry, Inc. v. Factory Mutual Insurance Company (Supreme Court of Maryland)

Filed: December 15, 2022

Opinion by: Chief Justice M. Fader

Holding: The Supreme Court of Maryland held that a retailer’s all-risk property insurance policy, that provided coverage for all risks of physical loss or damage to the insured premises, did not cover the retailer’s losses due to the COVID-19 Pandemic as insured premises did not suffer any tangible, concrete, and material harm. The Supreme Court of Maryland answered the certified question of law for the United States District Court for the District of Maryland.

Facts: Tapestry, Inc. is a retailer operating stores nationwide, including 15 stores in Maryland.  Tapestry obtained two “all-risk” commercial property insurance policies from Factory Mutual Insurance Company (“FM”) during the COVID-19 Pandemic.  The insurance policies insured the property against all risks of physical loss or damage.  The policies did not define “physical loss or damage.” Tapestry provided a coverage notice to FM citing the COVID-19 Pandemic.  FM denied coverage as Tapestry could not show that the presence of COVID-19 causes physical loss or damage.  Tapestry filed suit in the Circuit Court for Baltimore County.  FM removed the case to the United States District Court for the District of Maryland.  In its complaint, Tapestry sought a declaratory judgment that the two policies issued by FM covered the losses it had suffered, and that FM was responsible for paying Tapestry’s claim. Tapestry also sough an award of damages for FM’s breach of contract in denying coverage under the two policies.  FM moved to dismiss the complaint. Tapestry filed an opposition to the motion to dismiss and a motion to certify a question of law to the Supreme Court of Maryland. The United States District Court for the District of Maryland granted the motion to certify the question of law and issued the Certification Order.

Analysis: The Supreme Court of Maryland interpreted “physical loss or damage” by analyzing the plain meaning of and interpreting the phrase in the context of the two policies.  Tapestry argued that the plain meaning of “physical loss or damage” embraces the functional loss of use of the property. Tapestry argued that the two policies use of “loss” and “damage” implied that they have different meanings and both could not require physical damage to property. The Supreme Court of Maryland disagreed, believing that the term involved tangible, concrete, and material harm to the property.  The Supreme Court of Maryland believed Tapestry’s interpretation of a functional loss renders “physical loss or damage” meaningless in the policies, including the Time Element coverage and the Interruption by Communicable Disease, both of which clearly require tangible, concrete, and material harm to the property. The Time Element coverage must be the result of “physical loss or damage” that results from a covered cause, not a functional loss.  The Interruption by Communicable Disease does not require “physical loss or damage” as it is triggered by the restriction on access to the premises, undermining Tapestry interpretation of a functional loss requirement. Assuming what is known about the Coronavirus, the Supreme Court of Maryland concluded that the presence of Coronavirus in the air and on the surfaces of Tapestry’s properties did not cause “physical loss or damage” as is required under the policies.  The Supreme Court of Maryland further interpreted recent insurance claims as a result of the COVID-19 Pandemic including, GPL Enterprise LLC v. Certain Underwriters at Lloyd’s, 254 Md. App. 638 (2022), addressing similar arguments made by Tapestry, to conclude that physical loss or damage “requires tangible, concrete, and material harm” to the property.  The Supreme Court of Maryland answered the certified question of law that the Coronavirus cannot cause “physical loss or damage” without tangible, concrete, and material harm to the property or deprivation of possession of the property. 

The full opinion is available in PDF.

Nesbitt v. Mid-Atlantic Builders of Davenport, Inc. (App. Ct. Md.)

 Filed: September 28, 2022

Opinion by: J. Beachley

Holding: The court held that a trial court that compels arbitration retains jurisdiction after an arbitrator has entered an award over the case, even if a party voluntarily dismisses the case pending before the trial court. 

 

Facts: Appellants, Gwendolyn and Leeroy Nesbitt, filed a class action lawsuit against Appellee Mid-Atlantic Builders of Davenport, Inc., in the circuit court for Prince George’s County, alleging violations of certain statutory disclosure requirements related to water and sewer assessments in the sale of residential real property. The circuit court stayed the case pending arbitration based on the terms of the sales agreement that contained an arbitration provision, and after an adverse ruling against the Nesbitts by the arbitrator, Appellants filed a Notice of Dismissal with the circuit court. However, the circuit court struck the Notice, confirmed the arbitration award, and awarded attorney’s fees to the Respondents, resulting in an appeal by the Appellants.

 

Analysis: The Court found that while a plaintiff retains the absolute right to voluntarily dismiss a case at any time before the adverse party files an answer under Md. Rule 2-506(a), there was no Maryland case on point as to how to proceed where a trial court has compelled arbitration, and the Notice is filed after an award was made by the arbitrator. The Court found the reasoning of the 11^th Circuit persuasive that while a plaintiff could dismiss its own claims in the stayed proceeding that ordered arbitration, the trial court retains jurisdiction over the case to confirm or vacate the resulting arbitration award. PTA-FLA, Inc. v. ZTE USA, Inc., 844 F.3d 1299 (11^th Cir. 2016). In the event the defendant had filed a motion to confirm the arbitration, the trial court retained jurisdiction over this collateral claim, even when the plaintiff filed a Notice of Dismissal. Id. at 1308.

 

In the present case, the Court found that Maryland Rule 2-506(a) was substantively similar to its federal claim dismissal rule in Federal Rule 41(a)(1). In addition, the Court found that the Maryland Uniform Arbitration Act provides post-arbitration award procedures for the trial court that originally stayed to compel arbitration, including jurisdiction to modify, correct, vacate, or confirm the arbitration award. Md. Courts & Jud. Proc. Code Ann. § 3-201, et seq. (2020). The Court interpreted the Maryland dismissal and post-arbitration award procedures to conclude that the circuit court retained jurisdiction over a collateral claim, such as the defendant’s motion to confirm the arbitrator’s award, based on the 11^th Circuit’s interpretation of similar federal statutes, thereby affirming the trial court’s order.

 

Full opinion here.

 

Access Funding, LLC v. Linton (Sup. Court of Md.)

 Filed: December 1, 2022

Opinion by: J. Watts

Holding: The court held that the question of whether an arbitration agreement existed between Respondents and Petitioner factoring companies that purchased certain structured settlement agreements concerning lead paint poisoning was not a question to be decided by the arbitrator.

 

Facts: Structured settlement agreements are regulated by statute under Maryland law and generally require that such agreements are approved by a court after the payee receives independent advice as to the arrangement. Md. Courts & Jud. Proc. Code Ann. §§ 5-1101 – 5-1112. The Court noted that this statute had been amended several times since 2000, generally increasing the scrutiny to which such agreements are subjected by courts.

 

Respondents, Crystal Linton and Dimeca D. Johnson, were both lead paint tort plaintiffs who had each obtained structured settlements, and who signed agreements transferring the rights in these agreements to Petitioner Access Funding LLC and Assoc, LLC, in exchange for discounted lump sum cash payments. These agreements contained broad, mandatory arbitration clauses, including a provision that required that the validity of the arbitration agreement “shall be resolved by mandatory binding arbitration.”

 

After substantial litigation, including class certification and attempted settlement of the class action suit by the parties, the circuit court ordered the case to be arbitrated, over the objection of Respondents. 

 

Analysis: The Court’s analysis begins with the strong presumption that written arbitration agreements are generally enforceable under federal and state law, and that the Maryland Uniform Arbitration Act (“MUAA”) “’strictly confines the function of the court in suits to compel arbitration to the resolution of a single issue – is there an agreement to arbitrate the subject matter of a particular dispute.’” Md. Courts & Jud. Proc. Code Ann. §§ 3-201 to 3-234; Gold Coast Mall Inc. v. Larmar Corp., 298 Md. 96 (1983).

 

In the present case, however, the Court found that the circuit court erred when that court decided that the issue of whether the arbitration agreement was valid was itself subject to arbitration. Instead, the Court found that the Respondents’ complaint contained allegations that the arbitration agreement was obtained by fraud and deceit, and that the court reviewing the structured settlement agreement would not have approved of the agreement had it been aware of the relationship between Smith (the purportedly independent attorney hired to advise Respondents under the state law) and one of the Petitioner factoring companies. 

 

The Court distinguishes two cases raised by Petitioners: Prima Paint and Holmes. In Prima Paint, the US Supreme Court held that absent an allegation that the arbitration provision within an agreement (rather than the agreement as a whole) was procured through fraud, an otherwise broad arbitration clause would require that an arbitrator rather than a federal court would decide the issue of fraud in the inducement to enter into the overall agreement. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). The Court’s gloss of Holmes v. Coverall N. Am. Inc., 336 Md. 534 (1994) is that where a trial court finds the arbitration clause itself to be valid, the remainder of the question of validity of the entire agreement is a matter for the arbitrator rather than the court. 

 

The Court, however, distinguishes the present case by holding that the Respondent’s complaint specifically alleges that Petitioner’s use of Smith as counsel was intended to prevent Respondents from understanding the arbitration provision, thereby engaging in fraud in the inducement to that severable clause, and the enforceability of the arbitration clause was conditioned on the closing of the transaction, which itself was conditioned on entry of an order of approval by a court of competent jurisdiction as required by Maryland law. If such order was obtained by an “extrinsic” fraud, such as that the attorney purportedly representing Respondents was part of a scheme with Petitioners to prevent Respondents from understanding the arbitration agreement contained within the structured settlement contract, then such arbitration agreement is subject to collateral attack, which ultimately must be decided by a court rather than an arbitrator under MUAA.

 

As a result, the Court affirmed the reversal of the circuit court’s order compelling arbitration.

 

 

Full opinion here.

 

Brown v. Brown's Maryland Motors, Inc. (Md. U.S.D.C.)

 Filed: June 10, 2022

Opinion by: J. Bredar

Holding: The court held that the arbitration provision within the employment agreement between Plaintiff James D. Brown and Defendant Brown’s Maryland Motors, Inc. was enforceable as to Plaintiff under Maryland law.

 

Facts: Plaintiff was a department manager of Defendant’s car dealership. In 2015, Plaintiff signed an employment agreement that contained a broad arbitration agreement clause, and was subsequently terminated in 2019 from his employment for allegedly raising complaints about ongoing sexual harassment of several employees by a senior manager at the dealership. Plaintiff filed a charge of discrimination with the EEOC and was issued a right to sue letter. After filing of his timely federal lawsuit, Defendant moved to compel arbitration of the dispute.

 

Analysis: Plaintiff challenged the enforceability of the arbitration agreement on several grounds, including invalidity under Maryland law and that the agreement would foreclose him from effectively vindicating federal statutory rights.

 

The Court, in particular, evaluated whether the arbitration clause was unconscionable under Maryland law. To demonstrate unconscionability, the Plaintiff has the burden to show that the arbitration provision is both procedurally and substantively unconscionable. As to the former, such clause must be shown to be extremely unfair to the Plaintiff because of a lack of meaningful choice and contractual terms that unreasonably favor the other party. Walther v. Sovereign Bank, 872 A.2d 735, 743 (Md. 2005). As to the latter, such clause must be shown to either unreasonably favor the dominant party, impair the bargaining process or otherwise violate public policy, attempt to alter fundamental duties otherwise imposed by law, or are otherwise unreasonably and unexpectedly harsh. Id. at 744.

 

As to procedural unconscionability, the Court found that the Plaintiff failed to allege facts sufficient to establish that Plaintiff lacked sufficient choice or the ability to negotiate with his employer. Instead, relying on Falls, the Court found that Plaintiff was in a similar position to a CEO who was highly compensated and a sophisticated employee that made high value contributions to the company. Falls v. 1CL, Inc., 67 A.3d 521, 535 (Md. 2012). As a result, the Court found that Plaintiff failed to demonstrate procedural unconscionability of the arbitration agreement.

 

As to substantive unconscionability, the Court found that the Plaintiff’s allegations were insufficient to support a finding of substantive unconscionability, even if such terms operated to the perceived detriment of the weaker party.

 

Alternatively, the Court evaluated whether the arbitration clause would prevent Plaintiff to be able to vindicate his federal statutory rights on the grounds that the cost of arbitration would be too and the arbitrator would not permit sufficient discovery for Plaintiff to make his case. The Court found as to the former that Plaintiff had merely speculated as to the cost of the case when the Plaintiff could have actually obtained an estimate of the arbitration fee from the arbitrator, and that even accepting Plaintiff’s high estimate of $31,000, the Court found that such costs were not prohibitive in light of Plaintiff’s value of his claim at over two million dollars. As to the issue of discovery, the Court found that the rules of the arbitrator may require limited discovery, but that the Plaintiff’s conclusions that discovery would be inadequate was “factually inaccurate and procedurally premature.”

 

As a result, the Court granted Defendant’s motion to compel arbitration.

 

 

Full opinion here.

 

Cherington Condo. v. Kenney (App. Ct. Md.)

 Filed: March 31, 2022

Opinion by: J. Leahy

Holding: The court held Appellee Heather Kenney’s claims before the Commission on Common Ownership Communities for Montgomery County (“CCOC”) sufficiently alleged that the Board of Appellant Cherington Condominium Association violated the business judgment rule by potentially entering into an interested transaction, which required a showing that the Board’s decision was fair and reasonable to the Association.

Facts: Appellee is a resident of one of the twelve, “garden-style” units within the Appellant condominium development. The remaining eighty-seven units are “townhouse-style” units. While all unit owners are eligible to serve on the Appellant’s Board, only townhouse-style owners served on the board in 2019, when the challenged budget was ratified. Appellee asserted that the 2019 budget violated the Association Declaration and Bylaws by requiring “garden-style” unit owners to contribute to the cost of maintaining outdoor spaces around the townhouse-style units. Included within the 2019 budget was an assessment increase of $47 per month for townhouse-style units, but a $112 per month for garden-style units.

Analysis: The Appellate Court of Maryland* reasoned that decisions of boards of condominium associations are subject to the business judgment rule, which is a “‘presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.’” Such presumption can be overcome if the person challenging a board’s decision can demonstrate either that the board acted by way of fraud or in bad faith, or if the person can show that a board member had a conflict of interest related to the board’s decision. If there is evidence of a conflicted transaction, the burden shifts to the board to show that the decision was “just and proper.”

In addition, the Court reasoned that the codification of Corporations and Associations Article § 2-419 did not fully supplant the common law on interested director transactions, though the section does provide a method for establishing a particular interested transaction is just and proper by way of disclosure of the conflict prior to a vote by disinterested board members on the transaction.

In the present case, the Court found that the board was comprised entirely of interested board members, as all board members were townhouse-style unit owners who all could benefit from the contract for landscaping which included costs only applicable to outdoor spaces around the townhouse-style units, but which would be subsidized by garden-style unit owners. The Court remanded the case to CCOC to make findings of fact related to the landscaping contract, including whether the contract was fair and reasonable in light of the interested director transaction rule.

 
* At the time this opinion was issued, Maryland’s intermediate court was named the “Maryland Court of Special Appeals.” However, the voters of Maryland adopted a constitutional amendment in the 2022 election that changed the name of Maryland’s appellate courts, such that this court is now called the Appellate Court of Maryland.
 
Full opinion here.

Myong Nam Kim v. Board of Liquor License Commissioners for Baltimore City (App. Ct. Md.)

Filed: June 29, 2022

Holding: A Maryland statute that allowed certain beer, wine, and liquor license holders in a certain area of a legislative district to exchange their licenses for other licenses under certain circumstances and restricted the hours of operation for certain licensees in a separate area of the same legislative district did not violate the one subject requirement in Article III, § 29 of the Maryland Constitution and was not shown to violate equal protection as guaranteed by the Fourteenth Amendment to the United States Constitution and Article 24 of the Maryland Constitution.

Opinion by: Judge Donald E. Beachley

Summary: Three Class B-D-7 beer, wine, and liquor license holders (the “Licensees”) in Baltimore City (the “City”) were cited for violating a statute that (i) allowed Class B beer, wine, and liquor license holders in a certain area of the City to exchange their licenses for Class B-D-7 licenses, provided that the license holder executed a memorandum of understanding with a local community association; and (ii) restricted the hours of operation for Class B-D-7 licenses in a separate area of City where the Licensees where located.  The Licensees challenged their citations before the Board of Liquor License Commissioners for Baltimore City (the “Board”), arguing that the statute was unconstitutional because (i) it violated Article III, § 29 of the Maryland Constitution, which requires that all laws enacted embrace but a “single subject” and; (ii) it violated equal protection as guaranteed by the Fourteenth Amendment to the United States Constitution and Article 24 of the Maryland Constitution, because the law improperly targeted African Americans because the restriction of operating hours impacted a predominantly African American community.  The Board held that the statute did not violate the single subject requirement and that the Licensees did not produce evidence to support their equal protection claim.  The Licensees appealed the Board’s decisions to the Circuit Court for Baltimore City.  The Circuit Court affirmed the Board’s decision with respect to the single subject holding but reversed the Board’s decision with respect to the equal protection holding.  On appeal from the Circuit Court, the Court of Special Appeals affirmed the Board’s original decisions.

Analysis: The Court of Special Appeals began its analysis by discussing the rationale underlying the single subject provision.  First, it “prevent[s] members of the legislature from either selfishly or surreptitiously inserting unnecessary provisions which, standing alone, would likely not receive sufficient support to pass.”  Second, it preserves the integrity of the governor’s veto power by preventing “a practice under which the legislature could include in a single act matters important to the people and desired by the Governor and other matters opposed by the Governor or harmful to the welfare of the state, with the result that in order to obtain the constructive or desired matter the Governor had to accept the unwanted portion.”  The Court then noted its historically deferential approach to evaluating whether legislation violated the single subject rule, noting that a statute violates the single subject requirement only when the statute involves “two distinct and incongruous subjects” but that “a statute’s constitutionality may be upheld if the act’s subjects are ‘germane’ to one another, meaning that they have a ‘connection and interdependence’.” The Court further noted that “[i]f several sections of the law refer to and are germane to the same subject-matter, which is described in its title, it is considered as embracing but a single subject, and as satisfying the requirements of the Constitution in this respect.”  Applying these concepts, the Court held that, although the statute accomplished two separate things, the statute clearly referred to and were germane to the same subject matter—the overall regulation of alcohol in the City—and the statute thus did not violate the single subject requirement.  Additionally, the Court found that the legislative history showed that the two components of the statute were not put together in a way that implicated the underlying rationale for the requirement.

Next, the Court of Special Appeals addressed the Licensee’s argument that the statute failed the “strict scrutiny” test and thus violated equal protection as guaranteed by the United States and Maryland Constitutions.  The Court noted that the strict scrutiny test applies when evaluating a statute that “‘creates a distinction based upon clearly suspect criteria (such as race, gender, religion, or national origin), or when it infringes on a ‘fundamental’ right.’”  The Court then noted that the strict scrutiny test “will invalidate a statute … unless it ‘is necessary to promote a compelling governmental interest.’”  Finding that the statute is facially neutral, the Court held that the Licensees had the burden of establishing that a discriminatory purpose was a motivating factor in enacting the statute.  In reviewing the record, the Court found that the Licensees relied only on legislative history materials concerning the statute and Census data showing that the areas of the City affected by the operating restrictions were all approximately 90% African American but that contiguous areas of the City unaffected by the statute were closer to 5% African American.  Based on the record, the Court of Special Appeals held that “The Licensees failed to meet their burden. Their reliance on the legislative history materials concerning Chapter 389, as well as the Census data showing the racial distribution of different neighborhoods in Baltimore City simply show, at most, a racially disparate impact. That evidence does not, however, demonstrate the discriminatory intent or purpose necessary to support strict scrutiny review for equal protection purposes. In fact, our thorough review of the record in this case, including all of the legislative history materials available from the General Assembly, reveals that the sponsors and supporters of Chapter 389 were solely focused on curtailing crime in the region—not on discriminating against a suspect class.”

The full opinion is available in PDF.

Herman M. Braude v. John Jerry Robb (Md. Ct. of Spec. Appeals)

Filed: July 29, 2022

Opinion: Michael W. Reed

Holding:

The trial court erred in finding that there was no enforceable contract because there was insufficient consideration, as the appellant might recover under his claim for detrimental reliance depending on the version of events found credible. The trial court also erred in finding appellee did not breach his fiduciary duty to appellant because he was not appellant’s exclusive agent for the purpose of claiming the horse named Hydra, as appellee was appellant’s agent, owed appellant a fiduciary duty, and could not serve as agency for more than one principal who was seeking to purchase the same horse. Finally, the court incorrectly concluded that there was no factual basis or law that required it to address the legal theory of fraud. The Special Court of Appeals reversed and remanded for a new trial.

Facts:

Mr. John Robb (“Mr. Robb” or “Appellee”) is a horse trainer who owns his own stable, and has served as a horse trainer for Mr. Herman Braude (“Mr. Braude” or “Appellant”), a horse enthusiast and attorney, for more than 30 years. The dispute in this case centers on whether there was an enforceable oral agreement between Mr. Braude and Mr. Robb that Mr. Robb would claim for Mr. Braude a horse named Hydra during a race on January 4, 2020, at the Laurel Park Racetrack. According to Mr. Braude, Mr. Robb assured him several times that he would claim the horse. According to Mr. Robb, he had advised Mr. Braude that he would not claim the horse for him.

On January 2, 2020, Mr. Braude reviewed the advance race sheet for the Laurel Park Racetrack and became interested in Hydra, a one-year-old race horse racing two days from then for the claiming price of $25,000. A “claiming race” is one in which all horses racing are for sale at the same price, and one cannot physically examine a horse prior to the race. A horse is “claimed” by dropping a claim slip with the name of the horse, claimant, trainer, and the signature of the claimant into a lock box located at the Racing Office at least ten minutes before the post time for the race. Many claims are made in the minutes prior to the race when the horse is brought into the paddock area where a person can visually observe the condition of the horse. Mr. Robb had claimed at least 25 horses on behalf of Mr. Braude over the years.

Mr. Braude called Mr. Robb and asked him to submit a claim slip for Hydra before the race, and Mr. Braude asked his legal secretary, Ms. Dodd, to make formal arrangements with Mr. Robb to claim the horse. Mr. Robb texted Ms. Dodd that Mr. Braude needed to fill out a 2020 Authorized Agent form, since it was a new year. Mr. Robb and Ms. Dodd also communicated regarding wiring $25,000 from Mr. Braude’s personal bank account into his racing account at the Laurel Park Racetrack. On January 4, the day of the race, Mr. Braude filed the Authorized Agent form and added funds to his racing account to cover state taxes.

Mr. Braude met Mr. Robb in the paddock area to watch another horse owned by Mr. Braude and trained by Mr. Robb race. Mr. Braude informed Mr. Robb that he had $26,500 in his racing account and to meet him before Hydra’s race so they could jointly look at Hydra. Mr. Robb said he had not yet dropped a claim slip for Hydra, but he would. Video evidence shows Mr. Robb speaking to a man later identified as Mr. Eugene Gould, Jr. The parties provided conflicting testimony regarding their conversations about Mr. Robb dropping a claim slip on Mr. Braude’s behalf.

After the race, Mr. Robb told Mr. Braude there had been multiple claimants for Hydra and someone else had won. Mr. Braude later saw a report listing Mr. Gould as Hydra’s new owner and Mr. Robb as the new trainer. Mr. Braude fired Mr. Robb, and withdrew him as his authorized agent the following day.

On September 15, 2020, Mr. Braude filed a complaint in the Circuit Court for Montgomery County against Mr. Robb, alleging, among other things, breach of contract, breach of fiduciary duty, and fraud. After a bench trial, the circuit court denied Mr. Braude’s complaint for breach of contract and breach of fiduciary duty, but did not address the fraud count.

Analysis:

The court reviewed the bench trial decision, viewing the evidence in the light most favorable to the party who prevailed at trial, but reviewing the trial court’s legal findings de novo.

(1) The trial court in considering the breach of contract claim failed to make a credibility determination and determine whether detrimental reliance occurred.

Where a contact lacks formal consideration, a formal contract may nevertheless exist by virtue of the doctrine of detrimental reliance. The trial court found no enforceable contract because there was a lack of consideration; however, it failed to make any findings as to which version of events it believed. If Mr. Braude’s version of events were found credible and the court found that he had relied to his detriment on Mr. Robb’s promise to drop a claim for him, Mr. Braude might recover under his claim for detrimental reliance.

The trial court found other problems with the parties’ alleged contract, including that too much time had elapsed between the offer and acceptance, and that Mr. Braude failed to mitigate his injury because he did not put down his own claim and he chose not to claim Hydra in her next six claim races. The Court of Special Appeals finds these are not failures to contract in this context. If Mr. Braude’s version of events were found credible, there was offer and acceptance. Furthermore, under the theory of detrimental reliance, Mr. Braude was under no duty to drop a claim slip himself, as he had relied on Mr. Robb to do so for 30 years and was not in the physical condition to retrieve the horse himself. The Court directs the trial court to make findings of fact and a credibility assessment, and then conclusions of law as to whether there was a breach of contract.

(2) The trial court erred in denying the breach of fiduciary count, as a non-exclusive agent could not serve as an agent for more than one principal who sought to purchase the same horse.

Mr. Braude argues that the trial court erred in rejecting his breach of fiduciary duty count, on the ground that Mr. Robb did not owe him a fiduciary duty because Mr. Robb was not Mr. Braude’s exclusive agent for the purpose of claiming Hydra. The Court considers the duties of an agent to a principal, including the duty to “act solely for the benefit of the principal in all matters connected with his agency,” the duty to “avoid any conflict between his or her self-interest and that of the principal,” and the duty to “‘make full disclosure of all known information that is significant and material to the affairs’ of the fiduciary relationship.” Green v. H & R Block Inc., 355 Md. 488, 517–18 (1999) (citing RESTATEMENT (SECOND) OF AGENCY § 387 (1958); Ins. Co. of N. Am. v. Miller, 362 Md. 361, 380 (2001); Impala Platinum v. Impala Sales, 283 Md. 296, 324 (1978) (quoting Herring v. Offutt, 266 Md. 593, 597 (1972)).

The Court found Mr. Robb was Mr. Braude’s agent and owed him a fiduciary duty. Due to the conflicting testimony about whether Mr. Robb told Mr. Braude he would claim Hydra for him, the Court directs the trial court upon remand to make findings of fact and a credibility assessment, and then conclusions based on the applicable law as to whether there was a breach of duty.

(3) The trial court incorrectly concluded there was no factual basis or law that required it to address the legal theory of fraud.

Mr. Braude argues that the trial court erred when it failed to address his fraud count. Prior to addressing what error if any was made by the trial court, the Court holds that the trial court addressed all of the claims presented to it by the Appellant, including the fraud claim. The trial court disposed of the claim, even though it did not address each of the legal theories that Mr. Braude presented to support his claim: breach of contract, breach of fiduciary duty, and fraud. The trial court incorrectly concluded that there was no factual basis or law that required it to address the legal theory of fraud, therefore the Court remands for retrial on the issue of fraud.

The full opinion is available here.

GPL Enterprise, LLC v. Certain Underwriters at Lloyd’s, et al.

GPL Enterprise, LLC v. Certain Underwriters at Lloyd’s, et al. (Court of Special Appeals)

Filed: May 24, 2022

Opinion by: Judge J. Arthur

Holding:  The Court of Special Appeals held that a restaurant’s commercial property insurance policy that provided coverage for direct physical loss of or damage to the restaurant, including business interruption coverage, did not cover the restaurant’s losses due to the COVID-19 Pandemic and the Governor of Maryland emergency order that prohibited in-person dining. The Court of Special Appeals remanded the case to the circuit court as it failed to issue a declaratory judgment concerning the parties’ rights.

Facts:  GPL Enterprise, LLC operates a restaurant known as The Anchor Bar.  On March 16, 2020, the Governor of Maryland issued an emergency order that shutdown in-person dining and consumption at all Maryland restaurants and bars indefinitely in response to the COVID-19 pandemic. GPL was allowed to conduct carryout business and deliver orders, however, GPL incurred significant losses as a result of the emergency order. On March 30, 2020, GPL made a written demand for insurance coverage to the underwriters at Lloyd’s, claiming that as a result of the COVID-19 pandemic and emergency order, it suffered direct physical harm, loss, or damage to the premises. In its written demand, GPL noted that that policy did not contain an exclusion for losses due to a virus or bacteria and asserted an additional claim for business interruption as a result of an act of a civil authority in the emergency order that prohibited access to the restaurant. The underwriters denied the claim without clearly articulating the rationale, but appeared to conclude that neither the virus nor the emergency order caused direct physical loss of or damage to the restaurant and that business operation had not been suspended as a result of the direct physical loss. GPL filed a complaint in the Circuit Court for Frederick County alleging breach of contract and a declaratory judgment. The circuit court granted the underwriters’ motion to dismiss as GPL had not suffered physical damage to the property or a loss of property as result of the COVID-19 pandemic or emergency order, however the circuit court did not declare the parties’ rights. On appeal, the Court of Special Appeals affirmed the circuit courts dismissal of GPL’s complaint and remanded to the circuit court for the purpose of entering a declaratory judgment.

Analysis:  The Court of Special Appeals interpreted the insurance policy in light of numerous other cases involving policies substantially identical to GPL’s policy, and held that the phrase “physical loss of or damage to” property is unambiguous and requires some form of material alteration to the property to experience a loss or damage. The emergency order did not create a direct physical loss of the property or direct physical damage to it. The emergency order had no tangible or physical impact on GPL’s restaurant or on the property inside the restaurant such as the impact that a fire or earthquake would have. The Court of Special Appeals reviewed the business interruption coverage and concluded that the policy language assumes that a covered loss can be remedied by repairing, rebuilding, or replacing the lost or damaged property or by relocating the insured’s business to a new location. GPL could not alleviate the effects of the COVID-19 virus or the emergency order by repairing, rebuilding, or replacing its restaurant or by relocating its operations. Therefore, GPL suffered no direct physical loss of or damage to its restaurant to obtain business interruption coverage.

GPL argued that the Governor’s emergency order was the act of a civil authority which obligated the underwriters to cover the loss. The Court of Special Appeals noted that civil authority coverage applies when authorities have prohibited access to the insured’s premises due to damage of nearby property, such as when firefighters are fighting a fire. GPL did not allege damage to nearby property or dangerous conditions and therefore had no right to coverage under the policy. GPL attempted to distinguish between direct physical loss and direct physical damage, however, the distinction was unwarranted as GPL. The Court held that GPL had the opportunity to operate the restaurant as a carry-out and delivery operation but decided against it on the premise that such operation would be unprofitable, not because the property was uninhabitable.

GPL also argued that the loss of use of the restaurant was a direct physical loss. Although the Court of Special Appeals conceded that the emergency order did cause an economic loss to GPL, it did not cause a direct, physical loss of property, the latter being a precondition for policy coverage.

GPL further argued that the absence of an exclusion for a virus in the policy implied the existence of coverage.  The Court of Special Appeals disagreed as the determination whether a policy provides coverage is by looking at what the carrier agreed to insure rather than what the insurer failed to exclude, therefore, the underwriters did not provide coverage even without a virus exclusion. As a declaratory judgment should only be dismissed when a party has no right to a declaration such as the issue is not justiciable or the party lacks standing, the Court of Special Appeals remanded to the circuit court to enter a declaratory judgment as to coverage under the policy.

The full opinion is available in PDF.