Monday, November 14, 2022

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.

Thursday, August 25, 2022

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.

Wednesday, April 27, 2022

Norino Properties LLC v. Balsamo (Md. Ct of Special Appeals)

Filed: December 15, 2021

Opinion By: J. Graeff

Holding: The Court of Special Appeals affirmed the decision of the in banc Circuit Court, finding that the trial court’s dismissal with prejudice of plaintiff was an abuse of discretion, and granted plaintiff leave to amend his complaint against the defendants. The Court also held that in banc review of a dismissal with prejudice was within the notion of a “trial” under Article IV § 22 of the Maryland Constitution.

 

Facts: Plaintiff Joseph Balsamo originally filed a lawsuit in 2012 against his co-owner, Defendant John Zorzit, and their company, Balsamo and Norino Properties, LLC (the “LLC”), seeking judicial dissolution of the LLC. In 2015, the trial court entered an order denying the request for judicial dissolution, but ordering an independent account of the LLC capital accounts. In 2019, Plaintiff filed a new lawsuit against Defendant Zorzit and the defendant’s entity, Norino Properties, seeking judicial dissolution of the LLC and several other causes of action in contract, tort, and constructive fraud.

 

The defendants filed a motion to dismiss for failure to state a claim and on the grounds of res judicata, as the defendants argued that the claims in the 2019 complaint had already been decided on the merits in the prior litigation. A hearing was held on January 9, 2020 before the circuit court on the motion, which included a colloquy between Mr. Balsamo’s attorney and the court concerning additional evidence obtained during discovery that would support amendment of the complaint to plead actual fraud on the part of the defendants. In a written memorandum, the trial court dismissed plaintiff’s amended complaint with prejudice, and the plaintiff filed a motion to alter or amend the dismissal, supported by an affidavit of additional testimony that would support amendment of the complaint and would be offered at a hearing for a preliminary injunction. This motion to alter or amend was denied and the Plaintiff filed a Notice of In Banc Review with the circuit court. The court assigned three circuit court judges to the in banc panel, and that panel reversed the trial court’s dismissal of plaintiff’s amendment complaint, with thirty days leave to file a second amended complaint. An appeal was taken by the defendants to the Court of Special Appeals, alleging that in banc review was improperly granted under Article IV § 22 of the Maryland Constitution.

 

Analysis: In banc review is authorized by Article IV, § 22 of the Maryland Constitution, which provides: “where any trial is conducted by less than three Circuit Judges, upon the decision or determination of any point, or question, by the Court, it shall be competent to the party, against whom the ruling or decision is made, upon motion, to have the point, or question reserved for the consideration of three Judges of the Circuit, who shall constitute a court in banc for such purpose…” At issue before the Court of Special Appeals was whether “trial” in § 22 encompassed review of a final judgment such as a motion to dismiss with prejudice.

 

The Court reviewed prior case law involving in banc review and the definition of trial, and on balance found that a trial in the context of such review is available after “an action by which issues or questions of fact are decided” and that results in a final judgment, including a motion to dismiss a complaint with prejudice.

 

Full opinion here.

Friday, April 22, 2022

Hardwire LLC v. Ebaugh (Maryland U.S.D.C.)

Filed: August 25, 2021

Opinion by: J. Bredar

 

Holding: The court held that Hardwire’s claim of ongoing misappropriation of its trade secrets by the defendants that began prior to the amendment of the federal RICO statute to include the misuse of trade secrets as a racketeering activity in 2016 could not sustain personal jurisdiction over the Freyssinet defendants, and that alternative theories of personal jurisdiction were insufficient to prevent dismissal of the Freyssinet defendants from the action against Ebaugh.

 

Facts: Ebaugh was a former employee of Hardwire LLC, who was terminated in February, 2013 and formed a competitive business, Infrastructure Armour, LLC, allegedly using Hardwire’s trade secrets and confidential information to obtain a multi-million-dollar bridge contract from Freyssinet International. Hardwire’s theory of the case is that Freyssinet was using Hardwire’s confidential proposals for a bridge project in New York to seek a proposal from Ebaugh through his company that would undercut Hardwire’s bid. After learning about this information sharing arrangement, Hardwire amended its complaint to add Freyssinet International and Freyssinet USA as defendants on the theory that the defendants had engaged in a violation of the RICO statute, federal and state trade secrets laws, fraud, civil conspiracy, and violations of the federal Sherman anti-trust statute.

 

At issue in the case is whether Hardwire properly stated a claim under the RICO statute at 18 U.S.C. § 1965(d), which such claim permits nationwide service of process on a defendant and the exercise of personal jurisdiction in any federal district court under Rule 4(k)(1)(C).

 

Analysis: A plaintiff must plausibly allege four elements to state a claim under the RICO statute: (1) conduct causing injury to business or property, (2) of an enterprise, (3) through a pattern, (4) of racketeering activity. “Racketeering activity” includes numerous criminal violations including the theft of trade secrets under 18 USC § 1832(a) as amended by Congress under the “Defense of Trade Secrets Act” (DTSA) on May 11, 2016. However, courts presume that amendments to RICO do not apply retroactively absent continued engagement by a defendant after the effective date of the amendment.

 

Hardwire alleged that the use and disclosure by Freyssinet USA of Hardwire’s trade secrets that began in 2013 continues to the present is “continued engagement” under DTSA. The court, however, found that the initial theft of trade secrets that occurred before the amendment of DTSA, was separate from the ongoing use of those same trade secrets before and after the amendment, resulting in Hardwire failing to state a claim under the RICO statute.

 

The court evaluated alternative bases for the exercise of personal jurisdiction over Freyssinet, including civil conspiracy under the Maryland long arm statute and the “100-Mile Bulge Rule.” As to the former, the court found that the plaintiff had failed to allege what overt acts were taken in Maryland by Ebaugh and Infrastructure Armour LLC with Freyssinet, given that the bridge project at issue here occurred in New York for a New York bridge, or would have occurred where Freyssinet USA had incorporated and located its principal place of business in Virginia.  As to the latter, the court found that the plaintiff had failed to demonstrate how the 100-Mile Bulge Rule in Rule 4(k)(1)(B) would apply to Freyssinet, as the defendants were joined under Rule 20(a)(2), but the Rule applies to joinder under Rules 14 or 19 of the FRCP.

 

Full opinion here.

Friday, April 15, 2022

Pizza di Joey, LLC and Madame BBQ, LLC v. Mayor and City Council of Baltimore, 470 Md. 308 (Ct. of Appeals)

Filed: August 17, 2020

Holding: The City 300-foot rule that prohibits food trucks from operating within three hundred feet of a brick and mortar restaurant that serves food similar to the food truck is not unconstitutional under Article 24 of the Maryland Constitution, and is not void for vagueness because, though there was a lack of guiding standards for enforcement, there are circumstances where the ordinance would be constitutional.

Opinion by: Judge Jonathan Biran

Summary: Two food truck operators (the “Food Trucks”) filed suit against the Mayor and City Council of Baltimore (the “City”) in the Circuit Court for Baltimore City, seeking a declaration that a provision of the City’s vending ordinance restricting food trucks from parking within 300 feet of a brick-and-mortar restaurant that primarily sells the same type of food (the “300-foot rule” or the “Rule”), deprives them of equal protection and substantive due process of law in violation of Article 24 of the Maryland Declaration of Rights.  After taking evidence, the Circuit Court held that the 300-foot rule does not violate Article 24’s equal protection and substantive due process requirements.  However, the Circuit Court sua sponte enjoined the City from enforcing the 300-foot rule, concluding that the Rule is impermissibly vague, notwithstanding that the Food Trucks had affirmatively waived the vagueness claim.  On appeal, the Court of Special Appeals ruled in favor of the City, finding that (i) the 300-foot rule does not violate Article 24’s equal protection and substantive due process requirements, (ii) the Food Trucks had not preserved a vagueness claim for appellate review, and (iii) any claim for vagueness failed on the merits.  On appeal, the Court of Appeals affirmed the Court of Special Appeals.

Analysis: The Court of Appeals began its analysis by determining whether the Food Trucks had standing to assert their substantive due process and equal protection claims, noting that “[u]nder Maryland common law, standing to bring a judicial action generally depends on whether one is aggrieved, which means whether a plaintiff has an interest such that he or she is personally and specifically affected in a way different from the public generally.”  The Court held that the Food Trucks had standing to challenge the Rule’s constitutionality because the record established, among other things, that (i) they paid for and received mobile vendor licenses; (ii) they would have operated in various commercial districts in the City of Baltimore but for the Rule and would have received substantial benefit from operating in those districts; and (iii) they altered their business plans as a result of the Rule.

Next, the Court of Appeals addressed the appropriate level of review for the constitutionality of the Rule and found that the deferential “rational basis” test was appropriate because it did not involve a “clearly suspect” criteria or infringe on a “fundamental” or “important personal” right.  The Court of Appeals then held that the Rule satisfied the rational basis review because “the restriction on the locations where the Food Trucks may operate are not arbitrary, oppressive, or unreasonable. To the contrary, the Rule directly furthers the City’s conception of what is necessary for its general welfare.”  The Court further held that the Rule would satisfy the more demanding “heightened rational basis” standard of review because the Rule “bears a ‘real and substantial relation’ to the legitimate interest the City has in ensuring the vibrancy of its commercial districts and, thereby, promoting the general welfare.  Among other things, the Court noted that the Rule avoided the “‘free rider’ problem posed by food trucks siphoning business from brick-and-mortar restaurants after those restaurants have invested their resources and become semi-permanent members of the neighborhoods in which they are based.”

Finally, the Court of Appeals addressed the claim that the Rule is void for vagueness.  The Court noted that the Circuit Court erred by invalidating the 300-foot rule based on a vagueness claim because the Food Trucks had affirmatively waived the claim.  However, because of that error, the Court concluded that it had authority to address the merits of the question.  First, the Court of Appeals held that the Rule was subject to a facial vagueness challenge because there was a lack of guiding standards regarding enforcement, such that “there is a high risk that authorities necessarily will enforce the law arbitrarily.”  Next, the Court noted that, “in order to prevail on a facial vagueness claim, the person challenging the statute must show that there is no set of circumstances under which the statute would be constitutional.”  Applying this standard, the Court held that the Rule was not unconstitutionally vague because there were obvious circumstances under which the statute would be constitutional (e.g., Pizza di Joey parking its food truck within 300 feet of a brick-and-mortar pizzeria).  The Court further held that the phrases used in the Rule, such as “primarily engaged in” and “same type”, are not vague because while not defined in the ordinance, they are common and have generally accepted meanings.

The full opinion is available in PDF.

Wednesday, April 6, 2022

Denise Potter, et al. v. Ruby Potter (Md. Ct. of Spec. Appeals)

Filed: September 13, 2021.

Opinion: Christopher Kehoe

Holding

Decedent’s membership interest in a limited liability company (LLC) was “property” under Maryland estate law that passed to decedent’s estate where LLC’s operating agreement which required the membership interest to pass to named successor was not a valid will under Maryland law. 

Facts

James Potter (“James”) owned an interest in a Maryland LLC. The members executed an operating agreement and a members’ agreement. The LLC’s operating agreement distinguished between a member’s “interest,” which was defined as that member’s right to share in the profits and losses of the LLC, and the member’s “rights,” which was the right of a member to participate in the management of the LLC. The members’ agreement stated that, upon a member’s death, that member’s interest and right in the LLC shall be transferred to the individual identified in the members’ agreement. 

According to the members’ agreement, James’s membership interest was to be transferred to Ruby Potter, and James’s membership rights were to be transferred to two other members of the company. Although James signed both the operating agreement and the members’ agreement, the record showed that the signing of operating agreement was not witnessed and the members’ agreement was witnessed by only one individual. 

James acquired his LLC interest after his marriage to Ruby Potter (“Ruby”) in 1984. However, James and Ruby separated in 2016. Subsequently, James married Denise Potter (“Denise”). Despite his divorce and subsequent re-marriage, James did not amend the members’ agreement to remove Ruby as his successor.  In 2017, James died intestate. 

Denise opened a small estate and was appointed as personal representative of James' estate. In a document filed with the orphans’ court, Denise identified James’s membership interest in the LLC as an asset of the estate. Thereafter, Ruby filed a complaint for declaratory judgement seeking a declaration that she was entitled to James’s membership interest as she was listed as his successor in the members’ agreement. 

The Circuit Court held that Ruby was entitled the interest because the members’ agreement was a contract which controlled the passing of James’s membership interest. The Court of Special Appeals reversed, for the reasons stated below. 

Analysis:

The Court held that the membership interest was “property” as defined by the Estates and Trusts code which passed to James’s estate because the operating agreement and members’ agreement were not valid testamentary instruments under Maryland law. The Court reached its holding after considering three questions: (1) whether the operating agreement and the members’ agreement are testamentary in nature; (2) whether Maryland law permits an LLC to agree that a member’s interest can transfer by means of an agreement that does not satisfy the statute of wills; and (3) whether there is any conflict between the Estates and Trusts code and the article governing limited liability companies. 

(1) The operating agreement and members’ agreement are not testamentary instruments that control disposition of the membership interest.

As the operating agreement and members’ agreement were not witnessed in accordance with the Estates and Trust code, the Court held that such documents were not testamentary instruments under Maryland law. However, the Court also had to decide whether James’s membership interest was “property” that fell within the scope of the Estates and Trusts code. The Estates and Trust Code provides that all “property” of a decedent is subject to the estates and decedents law, and thus may only pass via will or intestacy absent other statutory exception. See Md. Code Ann., Est. & Trusts §1-301. “Property” is defined as any interest that a decedent has in real or personal property except for property “which does not pass, at the time of the decedent’s death, to another person by the terms of the instrument under which it is held, or by operation of law.” Id. §1-201(r). 

Ruby argued that the operating agreement and members’ agreements were “instruments” under which the membership interest was held that required the interest to pass to another person. The conclusion being that, as a result, the interest was not “property” subject to the provisions of the Estates and Trusts code. The Court rejected this argument on the basis that “the relevant legislative history and caselaw indicate that the General Assembly did not intend for the definition of ‘property’” to mean what Ruby asserted. 

Legislative history revealed that “property” was intended to include “those assets which traditionally constituted what is sometimes called in Maryland the probate estate.” Potter v. Potter, 252 A.3d 17, 32 (Md. Spec. App. 2021), cert. granted, 259 A.3d 787 (Md. 2021). The Court looked to case law that established what constituted a testamentary instrument at the time the Estates and Trust code was enacted. The court concluded that “a writing that purports to transfer the maker’s property at death is testamentary in nature unless it is both irrevocable and based on an otherwise enforceable legal obligation whose performance is deferred during the maker’s lifetime.” Id. As a result, the Court held that the membership interest was subject to the Estates and Trusts code because the designation in the members' agreement was not irrevocable. Id. Indeed, the Court observed that James could have changed his designation at any time, but simply failed to do so. Id. As the interest was not irrevocable during James's lifetime, the court concluded that it fell within what would have been considered the "probate estate," and was accordingly "property" as defined by the Estates and Trusts code.    

(2) The Limited Liability Act did not Subvert the Estates and Trusts Code

Ruby argued that the limited liability act authorized companies to agree that Maryland’s testamentary laws do not apply to membership interests. This argument was based on section 4A-606 of the Corporations and Associations article which provides that, unless otherwise agreed, a member’s membership in an LLC terminates at death. Ruby argued that this provision allows LLCs to alter the default provisions and to agree to the disposition of membership interests upon the death of a member. 

The Court rejected this argument based on the clear wording of the LLC Act. The LLC Act allows an LLC to make operating agreements that are “not inconsistent” with “the laws of this State.” Md. Code Ann., Corps & Ass’ns, §4A-203(15). As discussed above, Maryland law imposes strict requirements on the disposition of property that falls within the Estates and Trusts code. As an LLC cannot make agreements inconsistent with Maryland law, the provisions of the operating agreement and members’ agreement which sought to disposed of James’s property were invalid as testamentary interests due to their non-compliance with the Estates and Trusts code. 

Finally, the court held that there was no conflict between the Estates and Trusts article and the Corporations and Associations article based on its holding that, under Corps & Ass’ns, §4A-203(15), an LLC operating agreement cannot be inconsistent with other state law.  

The full opinion is available here.



Monday, August 30, 2021

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

Filed: January 29, 2021.

Opinion: Deborah S. Eyler

Holdings:

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

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

Facts:

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

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

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

Analysis:

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

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

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

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

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

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

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

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

The full opinion is available in PDF

Thursday, August 26, 2021

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

Filed: July 15, 2021

Opinion by: Judge J. McDonald

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

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

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

The full opinion is available in PDF.

Wednesday, August 11, 2021

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

 

Filed: April 30, 2021

Opinion by: Judge Michele D. Hotten 

Holding: 

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

Facts: 

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

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

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

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

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

Analysis: 

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

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

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

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

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

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

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

The full opinion is available in PDF.