Anderson v. Burson (Ct. of Special Appeals)

Filed: December 22, 2010
Opinion by James P. Salmon

Held: A "person in possession" of a note has the right of a holder of the note, including the right to appoint a substitute trustee to the deed of trust securing the note and the right to proceed to foreclose under that deed of trust.

Facts: In 2006, the Andersons refinanced their home in Columbia, Maryland, borrowing $277,250.00 from Wilmington Finance, Inc. The loan was evidenced by a note and secured by a deed of trust on their home. Mortgage Electronic Registration Systems, Inc. ("MERS") was named in the deed of trust as the nominee of the lender. As explained by the Court:

In 1993, members of the real estate mortgage industry created MERS, an electronic registration system for mortgages. Its purpose is to streamline the mortgage process by eliminating the need to prepare and record paper assignments of mortgage, as had been done for hundreds of years. To accomplish this goal, MERS acts as nominee and as mortgagee, for its members’ successors and assigns, thereby remaining nominal mortgagee of record no matter how many times loan servicing, or the mortgage itself, may be transferred. MERS hopes to register every residential and commercial home loan nationwide on its electronic system.

Subsequently, MERS transferred its beneficial rights under the note and deed of trust to Morgan Stanley Capital Holdings, Inc., and its servicing rights to Saxon Mortgage Services, Inc. Thereafter, the Andersons began making their mortgage payments to Saxon.

Some time later, Morgan Stanley transferred its rights to Morgan Stanley ABS Capital I, Inc. The rights were then subsequently transferred to Deutsche Bank Trust Company Americas, as Trustee and Custodian for Morgan Stanley Home Equity Loan Trust, MSHEL 2007-2.

In 2007, the Andersons went into default on the note and deed of trust and various substitute trustees were named and foreclosure proceedings instituted. As part of the filings in the foreclosure proceedings, the substitute trustees filed a lost note affidavit claiming that the original promissory note had been lost. Subsequently, Mr. Anderson filed for bankruptcy protection.

Ultimately, the automatic bankruptcy stay was lifted and foreclosure proceedings resumed. The Andersons sought to obtain an injunction blocking the foreclosure because they alleged that the substitute trustees and Deutsche Bank had no legal standing to foreclose on the residence because they had failed to establish that Deutsche Bank was the lawful owner or holder of the note and deed of trust. They contended that in order for Deutsche Bank to have a right to name the substitute trustees it would have to demonstrate that it was a holder of the note. According to the Andersons, if DeutscheBank was not a holder then it had no right to appoint anyone to foreclose on the property. In support of this contention, they pointed out that the note was not indorsed by anyone in Deutsche Bank’s chain of title except Wilmington, but that Wilmington indorsed it after it had given up all of its right, title and interest in the note.

The substitute trustees stressed that the Andersons had never controverted the fact that the loan was in default and that they had not paid the money due under the note for a long period of time. They also pointed out that during the lengthy period the note had been in default, no one else had claimed ownership of the note. This proved, circumstantially, that it would be impossible to suppose that some third party owned the note. The substitute trustees also pointed out that, in Mr. Anderson's bankruptcy proceeding, he had listed the creditor who had a first lien on the residence as "Saxon Mortgage."

The circuit court had initially granted a temporary restraining order blocking the foreclosure, but, after an evidentiary hearing, dissolved the injunction. This appeal followed.

Analysis: The Court of Special Appeals rejected the argument of the substitute trustees that Deutsche Bank was a "holder" of the note because Maryland Comm. L. Art. § 1-201(20) defines a "holder" of a note to be one who is either in possession if (i) the note is payable to bearer or (ii) is payable to a person who is identified in the note. Deutsche Bank did not meet either qualification.

However, the Court concluded that Deutsche Bank was a "a non-holder in possession of the [note] who has the right of a holder" pursuant to Maryland Comm. L. Art. § 3-301(ii). This conclusion turned on the finding that Deutsche Bank was a successor to the holder. See Maryland Comm. L. Art. § 3-203(a).

Discussion: Because of the securitization of the residential mortgage market, it is more often than not the case that bank loans and the related promissory notes and mortgages have passed through several hands before a mortgage goes into foreclosure. Frequently, due to the large number of transfers, the paper trail evidencing each link in the ownership chain is imperfect. The question of whether parties holding these "imperfect" documents and who seek to enforce their rights by foreclosure can do so has become a matter of great contention due to the collapse of the residential housing market and the Great Recession. The Court of Special Appeals has clearly taken the position that the note and mortgage holders (or, perhaps more correctly, the note and mortgage possessors) will be allowed to assert all rights under the loans so long as they can show that they were successors to the holder or holders.

The opinion is available in PDF.

RCC, Inc. v. Cecchi (Cir. Ct. Mont. Co.)

Filed: November 18, 2010
Opinion by Judge Michael D. Mason

Held: To shield communications with non-lawyers using the attorney-client privilege, a party must show that the communication was reasonably necessary for the purpose of obtaining or providing legal advice. If the client is an individual, this means satisfying the "derivative privilege" test. If the client is a corporation, it must establish that the third parties are the “functional equivalent” of the client using a five-factor test.

Facts: A defendant attempted to discover communications by and between a plaintiff, its accountants, and its lawyer. The plaintiff claimed attorney/client privilege.

Analysis: The attorney/client privilege may protect communications involving an accountant when the accountant enables communication with the attorney by 'translating' complex accounting concepts. This privilege is narrowly interpreted. Most courts limit the application to instances where the accountant was necessary to facilitate the communication.

There is a four-part test: 1) to whom was the advice provided - client or lawyer; 2) where client's in-house lawyer is involved, whether counsel also acts as a corporate officer; 3) whether the accountant is regularly employed by the client; 4) which party initiated or received the communications.

Where the client is a corporation, there is a five-part test: 1) whether the communication was made for the purpose of securing legal advice; 2) the employee making the communication did so at the direction of his corporate superior; 3) the superior made the request so that the communication could secure legal advice; 4) the subject matter of the communication is within the scope of the employee’s corporate duties; and 5) the communication is not disseminated beyond those persons who need to know its contents.

In the given circumstances, the Court found it impossible to tell from a review of the documents and the privilege log the nature of the advice being sought or offered and the role being served by the intermediaries. The accountants had served the client for decades. A number of the communications were more than 10 years old, much older than the dispute. It was frequently difficult to tell who initiated the communication and why. Accordingly, the Court held the plaintiff had failed to meet its burden and it compelled production of the documents in question.

*The Court then stayed the effect of its order for 10 days to allow for the plaintiff to submit further information to the Court.

The full opinion is available in pdf.

Ocean Petroleum, Co., Inc. v. Yanek (Ct. of Appeals)

Filed: October 4, 2010
Opinion by Judge Mary Ellen Barbera.

Held: A lease term granting a tenant the option to purchase the land at "fair market value" must be interpreted within the context of the lease and the circumstances under which it was executed. Accordingly, the phrase “fair market value of the land” refers to the fair market value of the land to a buyer, unencumbered by the tenant's existing lease.

Facts: Appellant's lease agreement, for property on which its convenience store is located, provided that Appellant shall have the right and option to purchase the premises after twenty years. The lease directed the parties to negotiate a price and, if a negotiated price could not be reached, the price would be the fair market value, determined by appraisers. The parties could not agree on a purchase price or on the meaning of the phrase “fair market value,” with the dispute being whether “fair market value” meant the value as encumbered by the existing 99-year lease (the reversionary interest of the landlord) or the value as unencumbered. Appellant filed a complaint seeking a declaratory judgment construing that phrase. The lower court determined that “fair market value” should be determined as if the land were unencumbered.

Analysis: Employing an objective approach to contract construction, the Court “consider[ed] the plain language of the disputed provisions in context, which includes not only the text of the entire contract but also the contract’s character, purpose, and ‘the facts and circumstances of the parties at the time of execution.’” The Court reasoned that “[b]ecause the relevant provisions of the lease agreement contemplate a transaction between a landlord and a tenant rather than an ordinary property owner and potential buyer, these provisions indicate that the parties contemplated a transaction in which the property is sold free of the tenant’s encumbrance thereon.”

The full opinion is available in pdf.

Appiah v. Hall (Ct. of Appeals)

Filed: October 27, 2010

Opinion by Judge Mary Ellen Barbera

Held: To hold an employer liable for the torts of an independent contractor the employer must exercise control over the work that leads to the injury.

Facts: Seagirt is a shipping terminal owned by the Maryland Port Administration. The MPA contracted with P&O Ports of Baltimore, Inc. to conduct stevedoring at the terminal. Amongst other contractors that leased space at the terminal, Marine Repair Services delivered power to and monitored the temperature of refrigerated containers stored at the terminal. An employee of Marine Repair Services was severely injured in an accident involving a trucking company's attempt to pick up a refrigerated container. Plaintiff, as personal representative of the deceased, brought a wrongful death claim against the truck driver, the trucking company, P&O and the MPA.

The Circuit Court granted summary judgment in favor of P&O and the MPA. The Court of Special Appeals affirmed the Circuit Court.

Analysis: An employer will not be liable for the torts of an independent contractor unless the employer retained control over the operative details and manner of the work of the independent contractor such that the independent contractor is not free to do the work in his own way and the employer has retained control over the very thing that caused the injury in question. Here, the MPA and P&O's alleged accident investigation is not relevant to determining the issue of their control of the work performed by Marine Repair Services. Also, while the lease agreement required the MPA's permission before Marine Repair Services could install additional safety signs, permission was not required to impose safety protocol. In sum, Plaintiff failed to show how the MPA and P&O controlled Marine Repair Service's specific work of connecting containers to trucks.

Judge Murphy provided a dissenting opinion, joined by Judge Harrell, which contended the Court of Special Appeals and the Court interpreted too narrowly the "very thing that caused the injury."

The full opinion is available in pdf.

Jung Chul Park v. Cangen Corporation (Ct. of Appeals)

Filed: October 27, 2010

Opinion by Judge Mary Ellen Barbera.

Rule: The Fifth Amendment privilege against compelled incrimination affords no protection to a former corporate employee that is compelled to produce corporate documents in his possession.

Facts: A company filed a replevin action to recover thousands of documents allegedly stolen by its former CEO. During discovery, the company served a subpoena duces tecum upon another former employee, commanding him to produce all company documents in his possession. The employee asserted his Fifth Amendment privilege against compelled incrimination and refused to respond. The company filed a motion to compel production, which the circuit court granted. The employee noted an appeal, which was transferred to the Court of Appeals on its own initiative.

Analysis: The Court of Appeals affirmed, holding that the Fifth Amendment privilege against compelled incrimination affords no protection to a former corporate employee that is compelled to produce corporate documents in his possession. In so holding, the court reasoned that corporate documents belong to the corporation itself, and not to its former employee. The employee had no privilege to resist a subpoena compelling the production of corporate documents, even though the act of production may prove personally incriminating.

The opinion is available in pdf.

Pease v. Wachovia SBA Lending, Inc. (Ct. of Appeals)

Filed: October 21, 2010
Opinion by Judge J. Harrell

Held: In vacating the Circuit Court’s decision, the Court of Appeals held that the Maryland Credit Agreement Act (Courts & Judicial Proceedings 5-408(b)) does not bar the Circuit Court from considering negligence, fraud and breach of a fiduciary duty so long as the claims are not attempting to enforce either an oral credit agreement or oral modification of an existing loan agreement.

Facts: The Appellants sold a plumbing business in Virginia, relocated to Maryland, purchased a home and entered the market to purchase another plumbing business. After identifying a potential target, the Appellants elected to finance the acquisition using a SBA loan provided by the Appellee. With the goal of protecting their house from any possible foreclosure arising from the commercial loan, the Appellants also created two legal entities, one to own their house and the other to own their business.

Upon alleged advice from Appellee’s agent, the Appellants also reduced the equity in their house to an amount less than twenty-percent by encumbering their home with a home equity line of credit with the Appellee. The Appellants also learned on or around closing that the target business had weaker financials than originally contended, and alleged that the Appellee withheld certain negative financial information from them until after settlement.

Settlement of the purchase took place in August 2005, and the Appellants signed the loan agreement, including a confessed judgment clause and a guarantee secured by their house. In November of 2007, Appellants defaulted on the commercial loan, and Appellee accelerated the loan and instituted proceedings. The Circuit Court for Baltimore City entered and indexed confessed judgments against both of the Appellants’ business entities in January of 2008.

The Appellants filed a motion to open, modify, or vacate the confessed judgments in April of 2008, asserting allegations of negligence, fraud, and breach of fiduciary duty. Appellants asserted that Appellee and its agent verbally misrepresented that this “artificial loan” would safeguard their home from foreclosure if they defaulted under the SBA loan, and that these statements were made to induce them into executing the SBA loan. Appellee argued Appellants’ defenses were barred by the Maryland Credit Agreement Act.

At the hearing, the Appellants argued that if the confessed judgment were vacated, they would seek to void the SBA loan and pursue the tort claims using the same facts. The hearing judge denied the Appellants’ motion on the basis that the Maryland Credit Agreement Statute barred their claims. Appellants appealed to the Court of Special Appeals. The Court of Appeals granted certiorari before the intermediate appellate court could decide the appeal.

Analysis: The Court after reviewing that Legislative History held that the Maryland Credit Agreement Act is intended to act as a statute of frauds for loan agreements, and accordingly, the Act would bar any of the Appellants’ counterclaims attempting to enforce either an oral credit agreement or a verbal modification of an existing loan agreement.

Applying the Courts holding to the Appellants’ counterclaims of negligence, fraud, and breach of fiduciary duty, the Court held that such claims were not attempting to enforce a verbal agreement to borrow or to modify an existing agreement, but did constitute an attempt to obtain a set-off against any recovery by the Appellee.

Applying the Courts holding to the Appellants’ attempt to void the loan agreements based on the same facts used in the tort claims, the Court found that this maneuver is the type that the Maryland Credit Agreement Act was intended to prevent. The Court found that the parol evidence in the current case, while not an attempt to enforce an oral credit agreement, was an attempt to enforce a verbal modification to an existing credit agreement by not enforcing the guaranty.

The Court of Appeals vacated the judgment of the Circuit Court and remanded to the court for consideration not inconsistent with the Court’s decision.

The full opinion is available in pdf.

Clipper Mill Federal, LLC v. The Cincinnati Insurance Co. (Maryland U.S.D.C.)

Filed: October 20, 2010
Opinion by Judge J. Frederick Motz

Held: When alleged property damage arising from an insured's failure to perform under a contract is limited to the property to be provided under the contract, there is no "occurrence" subject to coverage under a commercial general liability policy.

A "pollution exclusion" written to encompass more than environmental pollution will be enforced according to its plain terms.

Where a court cannot rule out the "potentiality of coverage" for even a single claim, the insurance carrier has a duty to defend all claims.

Facts: Tenants sued their landlord for defects in the HVAC system on a leased premises. The tenants alleged that the system failed to balance temperature, conducted sound between rooms, and exposed them to toxic and dangerous airborne pollutants. The tenants alleged six counts: 1) breach of warranty of quiet enjoyment, 2) negligence, 3) negligent misrepresentation, 4) strict liability, 5) nuisances, and 6) loss of consortium.

The landlord tendered the defense to its insurance carrier. The insurance carrier denied coverage, and the landlord sued seeking a declaration that the insurance carrier had a duty to defend the underlying litigation.

Analysis: Under Maryland law, the obligation of an insurance carrier to defend its insured is determined by the allegations in the tort actions. If the plaintiffs in the tort suits allege a claim covered by the policy, the insurer has a duty to defend. The duty to defend arises whenever there is a "potentiality that the claim could be covered by the policy." If there is a possibility, even a remote one, that the claims could be covered, there is a duty to defend. Any doubt as to whether there is a potentiality of coverage is ordinarily resolved in favor of the insured.

The analysis depends on the allegations of the underlying complaint. If these are ambiguous, the insured may rely on extrinsic evidence. The insurance carrier, however, may not use such evidence to contest coverage if the allegations sufficiently establish a potentiality of coverage. If any claim is potentially covered under the policy, the insurer is obligated to defend all claims. The insurance carrier argued it had no duty to defend on several grounds.

No "Occurrence":
First, there was no "occurrence" subject to coverage. Rather, the alleged damages were caused by the landlord's failure to fulfill its contractual obligations under the lease. Because the plaintiffs' alleged damages involved only the use of the property that the landlord was obligated to provide, the court concluded that the damage was not the result of an "occurrence," as defined by the policy and Maryland law, and thus was not covered.

Pollution Exclusion:
Second, the insurance carrier argued the pollution exclusion barred coverage for damage caused by the alleged "airborne pollutants." The landlord countered that the pollution exclusion applied only to environmental pollution. The exclusion provided:

"Pollutant” means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, petroleum, petroleum products and petroleum byproducts, and waste. Waste includes materials to be recycled, reconditioned or reclaimed. “Pollutants” include but are not limited to substances which are generally recognized in industry or government to be harmful or toxic to persons, property or the environment regardless of whether the injury or damage is caused directly or indirectly by the “pollutants” . . .

The court noted that the Maryland Court of Appeals concluded that pollution exclusion in a commercial general liability policy did "not apply beyond traditional environmental pollution situations." Clendenin Bros., Inc. v. United State Fire Insurance Co. The court further noted, however, that an insurance policy is a contract and is to be read as any other contract. Thus, although the Maryland courts previously determined the meaning of a pollution exclusion, the parties to subsequent insurance contracts remain free to change the scope of the exclusion by altering the language of the contract. The policy in the present case contained an important distinction from that involved in Clendenin Bros. Specifically, it tracked the traditional language but added "‘Pollutants’ include but are not limited to substances which are generally recognized in industry or government to be harmful or toxic to persons, property or the environment. . . .”

The addition of this sentence expanded the definition of pollutant beyond environmental pollutants to include irritants and contaminants that harm persons but not the environment. Accordingly, the pollution exclusion applied to bar coverage for the alleged claim.

Bodily Injury Claims & the Pollution Exclusion:
Finally, the insurance carrier admitted that the bodily injury claims alleged harm to something other than the insured's work product but argued that they too were precluded by the pollution exclusion. The court concluded, however, that the claims were covered by an exception to the pollution exclusion for bodily injuries caused by the inadequate ventilation of "vapors." The basis: though the complaint did not allege facts placing the airborne particles within the definition of "vapors," it did not foreclose the possibility either. Accordingly, the court could not rule out the possibility that the exception applies, and a potentiality of coverage existed.

On that basis, the court held that the insurance carrier had a duty to defend all claims.

The full opinion is available in pdf.

Dean v. Beckley (Maryland U.S.D.C.)

Filed: October 1, 2010.

Opinion by Judge Catherine C. Blake.

Held: Allegations that Defendant failed to disclose to purchaser of an RV before selling a warranty that RV manufacturer had declared bankruptcy when questions were raised regarding the nature of the warranty is sufficient to deny a motion to dismiss a claim alleging fraud in the inducement.

Facts: Plaintiff made a down payment to purchase a new RV from a dealer. Before closing on the sale, the manufacturer of the RV filed for bankruptcy. Eight days later, Plaintiff and employees of the dealer discussed a limited warranty while conducting a walk-through of the RV. None of the employees informed the Plaintiff of the bankruptcy. Plaintiff purchased a seven-year warranty on the RV. Plaintiff soon discovered numerous problems with the RV allegedly covered by the warranty. In subsequent conversations, the dealer allegedly agreed to accept return of the RV and refund Plaintiff's money. Ultimately, the dealer refused both the return and the refund.

Plaintiff sued the dealer and the individual employee that discussed the warranty with the Plaintiff, alleging fraud in the inducement among other things. Defendants moved to dismiss.

Analysis: Under Maryland law, corporate officers are personally liable for the torts they personally commit. Plaintiff's allegations that the individual employee personally explained in detail the nature of the warranties they would receive, while knowing the manufacturer had filed bankruptcy, coupled with the allegation that the bankruptcy was a material fact within the "unique possession" of the Defendants is sufficient to permit the fraud claim to proceed against the individual.

The Court found allegations of false representations regarding (i) the quality of the RV itself and (ii) the acceptance of the RV's return and subsequent refund of Plaintiffs money to be insufficient as the representations concerning the quality of the RV were puffery and the alleged promise to accept a return was promissory in nature. However, Plaintiff made sufficient allegations regarding failure to disclose and fraudulent concealment of the manufacturer's financial troubles to deny the motion to dismiss.

"Generally, the failure to disclose does not amount to a false representation unless there is a separate duty to disclose." In transactions conducted at arm's length, such as here, a duty may arise if the fact is material, the concealer has superior knowledge and knows the other is acting on the assumption the fact does not exist. Here, Plaintiff alleged the specific inquiries regarding the warranty gave Defendants knowledge that Plaintiffs assumed the manufacturer would be able to honor the warranty."

The full opinion is available in pdf.

Boland v. Boland (Ct. of Special Appeals)

Filed: September 14, 2010
Opinion by Judge Deborah S. Eyler

Held: Courts must apply the business judgment rule in reviewing the decision of a board’s special litigation committee not to pursue a derivative claim alleging self-dealing.

Facts: Certain shareholders (the “Shareholders”) of Boland Trane Associates, Inc. and Boland Trane Services, Inc. (collectively, the “Corporations”) filed derivative claims against the Corporations, alleging that their directors engaged in self-dealing transactions. The directors appointed a special litigation committee to investigate whether to pursue the derivative claims. After conducting an investigation, the committee determined that the claims had no merit and advised that the directors seek to have the claims dismissed.

The circuit court granted summary judgment in favor of the Corporations, deferring to the special litigation committee’s decision under the business judgment rule. The Court of Special Appeals affirmed.

Analysis: The Court of Special Appeals held that the business judgment rule was the proper standard of review. Maryland case law has already addressed the level of deference courts must give to determinations of special litigation committees. A new standard does not apply simply because the Shareholders characterize their claims as alleging self-dealing. Unless the actual members of the special litigation committee themselves engaged in self-dealing (which was not the case), the court must defer to the committee’s decision in accordance with the business judgment rule.

The full opinion is available in pdf.

Central Truck Center, Inc. v. Central GMC, Inc. (Ct. of Special Appeals)

Filed: September 7, 2010.
Opinion by: Judge J. Frederick Sharer.

Held: This Court affirmed the trial court’s decision to grant summary judgment in favor of the Seller of a truck dealership on the basis that no fraud had been committed by the Seller and that an integration clause found in an agreement barred the Buyer from asserting claims of fraud (including fraud in the inducement), concealment, and negligent misrepresentation.

Facts:

The Seller initially sued the Buyer for breach of a written contract by failing to pay approximately $50,000. The Buyer counterclaimed for breach of contract, fraud, concealment, and negligent misrepresentation based upon Seller’s inaccurate financial statements resulting in a large part from the cancellation of a contract between the Seller and a government agency. The Buyer asserted that the proceeds of the government contract had inflated the Seller’s sales figures in the financial reports and that the Seller’s gross receipts on the financial reports were inflated due to overbilling the government agency.

The Seller sought summary judgment based, in part, on the grounds that the sale agreement contained an integration clause stating that it constituted a complete integration of the terms of the contract and superseded "all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, with respect hereto, except as contained herein." The sale agreement also did not contain any representations or stipulations to Buyer as to a continuation of Seller’s past income or the accuracy of Seller's financial statements.

The Seller also argued that: (i) the Buyer had no expectation of income from the government contract because it had expired months before the sale agreement was executed; (ii) the Seller retained (and thus did not sell) the accounts receivable after the closing; and (iii) the Buyer was aware of a pending audit of the Seller's billing practices by the government agency because the Seller had disclosed the investigation in the Exhibits to the sale agreement.

The trial court found no clear and convincing evidence that the Seller made any false representations to the Buyer, with the intent that the Buyer would rely on them, with regard to the status of the financial statements, the status of the government contract, and the allegedly overbilled contract.

The trial court determined that the Seller's financial statements were prepared and utilized in the ordinary course of business, not in anticipation of the parties' negotiations for the purchase and sale of the truck dealership. The Buyer asked to view the statements well before closing, but it did not take further action to verify or question the numbers prior to entering into the Agreement, even in light of its undisputed knowledge that an audit of the allegedly overbilled contract was in the offing. Especially given the integration clause, the fact that the financial statements were not incorporated into the agreement, and that the parties were sophisticated in business matters and represented by counsel, there was no evidence that Buyer reasonably relied on the figures in the Seller’s financial statements.

The Buyer appealed the lower court’s decision to grant summary judgment on the grounds that the lower court erred by employing the incorrect standard in evaluating the claims and wrongly concluded there was no dispute of material facts and improperly relied on the sale agreement’s integration clause to foreclose any argument on fraud, concealment and any of the tort claims such as negligent misrepresentation.

The Seller argued against the appeal on the grounds that the lower court: (i) properly applied the integration clause to bar the court from considering any document outside of the four corners of the agreement; (ii) correctly ruled that the record did not support a finding that the Seller made any false representations, and (iii) the lower court found proper notice of the status of the government contract and thus any reliance by the Buyer on a different status was improper.

Analysis:

This Court affirmed the lower court’s decision to grant summary judgment in favor of the Seller because the Buyer did not show that the Seller made any false representations that it justifiably relied upon or that it suffered compensable injury from such representations.

The Court evaluated the matter based on the elements for fraud under Maryland law, which are: (1) the defendant made a false representation to the plaintiff, (2) that its falsity was either known to the defendant or that the representation was made with reckless indifference to the truth, (3) that the misrepresentation was made for the purpose of defrauding the plaintiff, (4) that the plaintiff relied on the misrepresentation and had the right to rely on it, and (5) that the plaintiff suffered compensable injury resulting from the misrepresentation.

The Court found that the government contract, books and records were found to be in existence long before the sale agreement was even contemplated, and that the exhibits to the sale agreement provided notice to the Buyer of the pending audit by the government agency, and that the Seller made no representation to the Buyer that it could expect the same level of income in the summer months following the closing of the transaction.

The Court also found that the Buyer’s reliance on any statements by the Seller was improper because the Seller’s financial statements were prepared by the Seller and used by the Seller in its ordinary course of business and were provided to Buyer well before closing and the Buyer made no further investigation of the financial statements even though it had notice of a pending audit. It also found that the parties were represented by sophisticated service providers and could not understand how the Buyer could conclude that financial statements reporting the past could guarantee future performance.

The Court also found that the integration clause combined with the sophistication of the parties made the reliance by the Buyer of documents not part of the sale agreement (the financial statements were not included in the agreement) unreasonable.

The Court, even after assuming for argument purposes that the Seller misrepresented the sales figures and the Buyer justifiably relied on the misrepresentation, held that the Buyer did not present any clear and convincing evidence of any compensable injury as a result of such acts. Buyer's evidence of damages consisted of the speculative and unsupported assertion that it paid more for Seller’s dealership than the dealership was worth. The mere fact that Buyer's sales in the first three months of operating the dealership were lower than anticipated, based on the allegedly inflated revenues in Seller's financial statements, does not by itself establish that the Buyer's losses were caused by any unfulfilled promise by the Seller. Even if the allegedly overbilled contract had improperly inflated the Seller’s revenues, the Buyer had no expectation of any revenue from that contract, which expired prior to the negotiations for purchasing the dealership. Furthermore, the Seller had retained all rights to collect its account receivables.

The Court affirmed that lower court’s summary judgment in favor of the Seller because there was no evidence of any misrepresentation or concealment by the Seller.

The full opinion is available in PDF.

Cloverleaf Enterprises, Inc. v. Maryland Thoroughbred, Horsemen's Association, Inc. (Maryland U.S.D.C.)

Filed: August 25, 2010

Opinion by Judge Richard D. Bennett.

This is a companion opinion to the opinion, the summary of which was posted on August 16, 2010.

Held: (1) Allegations that the defendants conspired to orchestrate an illegal boycott require more proof to survive summary judgment than e-mails informing defendants that other parties to a consent agreement were withdrawing their consent.

(2) Contract provisions that provide that the contract can be terminated if certain governmental approvals or consents are not "private rights of action" to enforce provisions of legislative enactments, but are, instead, contractual provisions.

Facts: Cloverleaf Enterprises, Inc. owns a racetrack in Maryland that accepts horse racing wagers on live simulcast signals provided by other racetracks. The signals come from both Maryland and out-of-state racetracks. As required under federal and Maryland law, Cloverleaf obtained the consent of other Maryland racetracks and certain other groups before receiving the simulcast signals. The consent was in the form of a Cross-Breed Agreement, pursuant to which Cloverleaf paid weekly fees in return for the right to accept wagers on the simulcast races. Cloverleaf and TrackNet Media Group, LLC entered into a Simulcast Agreement, pursuant to which TrackNet agreed to simulcast horseracing content from certain other racetracks.

Cloverleaf breached the Cross-Breed Agreement by failing to pay the required weekly fees. As a result, the other Maryland racetracks withdrew their consent to Cloverleaf receiving the simulcast signals of their own races and out-of-state races. Following the withdrawal of consent, TrackNet informed Cloverleaf it could no longer distribute the horseracing content under the Simulcast Agreement.

Cloverleaf filed a complaint against TrackNet and Churchill Downs Incorporated alleging breach of contract. (Additional claims brought by Cloverleaf are discussed in the posting of August 16, 2010.) Defendants moved for summary judgment.

Cloverleaf contended summary judgment should be denied for three reasons: 1. the Maryland Jockey Club did not have the right under law to withdraw consent; 2. the Simulcast Agreement required approval to be withdrawn from a government entity for termination; and 3. the defendants participated in an illegal group boycott.

Analysis: The court applied Kentucky law to find the Simulcast Agreement was not breached. The agreement was free of ambiguity and "automatically terminated . . . upon the failure to obtain or withdrawal of any approvals required by any applicable laws . . . ." Thus, the agreement terminated when consent was withdrawn.

The court disagreed with all of plaintiff's arguments against summary judgment. First, the legality of the withdrawal of consent is irrelevant because the Simulcast Agreement did not require the defendants to assess the validity of the withdrawal. Second, the use of different words in the Simulcast Agreement, such as "approvals," "consents," and "requirements," did not convey different authorizations as the agreement stated termination can occur upon the "withdrawal of any approvals." Third, as a "party cannot create a genuine dispute of material fact through mere speculation or compilation of inferences," e-mails sent to defendants informing them of the withdrawal of consent lacked sufficient proof of an illegal group boycott to withstand summary judgment.

The full opinion is available in pdf.

Monmouth Meadows HOA, Inc. v. Hamilton; Montpelier HOA, Inc. v. Thomas-Ojo; Constant Friendship HOA, Inc. v. Tillery (Ct. of Appeals)

Filed: July 27, 2010

Opinion by Judge Sally D. Adkins

Held: In calculating attorneys' fees in breach of contract cases between private parties where the award of fees is not based on the terms of the contract, it is improper to use either the lodestar method or to calculate the attorney's fee by applying a flat percentage of the amount claimed. Instead, courts should use the factors set forth in Rule 1.5 of the Maryland Lawyers' Rules of Professional Conduct as a rubric for determining the reasonable attorneys' fees to award.

Facts: This opinion grew out of a number of cases involving claims by howeowners' associations against some of their members for delinquent association fees. As a condition of membership in each of the HOAs, each of the defendants was contractually obligated to pay annual assessments to their respective HOA and interest and late charges were assessed on any past due amounts that were owed for the annual assessments.

In each case, when the Defendant Resident did not pay the annual assessments or late fees when due, their respective HOA directed the law firm of Nagle & Zaller, P.C. to collect the debt. After Nagle & Zaller's attempt to collect the debt by contacting each of the Defendant Residents in writing was unsuccessful, each of the HOAs established and recorded liens on the property of their respective Defendant Resident in accordance with the Contract Lien Act as authorized by Section 14-203 of the Real Property Article of the Maryland Code, notified their respective Defendant Resident of the lien and demanded payment of the debt and the HOA's attorneys' fees in pursuing collection of the debt. When payment was not received, each HOA, through Nagle & Zaller, initiated suits against their respective Defendant Resident seeking payment of the debt and attorneys' fees as calculated by the lodestar method.

In each case, the district court elected to not use the lodestar method to calculate the attorneys' fees that would be awarded to the HOA, but instead awarded attorneys' fees based on a flat percentage of the principal amount sought by the HOA. Each HOA appealed the fee award to the applicable Circuit Court.

Certain cases were first appealed to the Circuit Court for Harford County. That court awarded the fees that each HOA incurred during its trial in the district court and did not award any fees that were incurred in the appeal process.

One case was initially appealed to the Circuit Court for Prince George's County. In that case, the Circuit Court held that it was not appropriate to use the lodestar method to calculate the attorneys' fees that were due to the HOA. It then looked to Rule 1.5 of the Maryland Lawyers' Rules of Professional Conduct as guidance. Concluding that the attorneys' fees requested by the HOA was unreasonably high for the work actually required, the Circuit Court for Prince George's County reduced the fee award to the HOA to $300.00 and did not award any fees that were incurred by the HOA during its appeal.

Analysis: Before addressing the argument by each of the HOAs that the lodestar method is the proper method that should be used in each of their cases for calculating the award of attorneys' fees, the Court of Appeals first explained that a court that uses the lodestar method calculates the fee award by multiplying the number of hours reasonably spent pursuing a legal matter by a reasonable hourly rate for the type of work performed and then adjusts the amount based on its view of the following external factors )set forth, and approved by the US Supreme Court, in Blanchard v. Bergeron, 489 U.S. 87 (1989):

(1) the time and labor required;
(2) the novelty and difficulty of the questions;
(3) the skill requisite to perform the legal service properly;

(4) the preclusion of other employment by the attorney due to acceptance of the case;
(5) the customary fee;
(6) whether the fee is fixed or contingent;
(7) time limitations imposed by the client or the circumstances;
(8) the amount involved and the results obtained;

(9) the experience, reputation, and ability of the attorneys;
(10) the 'undesirability' of the case;
(11) the nature and length of the professional relationship with the client; and
(12) awards in similar cases.

The court noted that the lodestar method could lead to fee awards that are much larger than the principal amount sought. The Court of Appeals then noted that, as established by its precedent in Friolo v. Frankel , the lodestar method is only generally appropriate in the context of fee-shifting statutes where the goals of public policy are advanced, such as in complex civil litigation involving challenges to institutional practices or conditions.

Because the Defendant Residents were obligated to pay the attorneys' fees to the HOAs as a result of the contract that was entered into by each of the Defendant Residents when they became a member of their respective HOA and not as a result of public policy or a fee-shifting statute, the Court of Appeals concluded that the lodestar method was not the appropriate method that should be used to calculate the fee award. Instead, agreeing with the method used by the Circuit Court for Prince George's County, the Court of Appeals held that a trial court should use the factors set forth in Rule 1.5 of the Maryland Lawyers' Rules of Professional Conduct as the foundation of its analysis in determining what constitutes a reasonable fee when the court is awarding attorneys' fees based on a breach of contract case where the award of fees is based on the terms of the contract. The Court also held that it was error to automatically apply a percentage of recovery "without a substantive inquiry into the appropriateness of [such an] award[]."

The full opinion is available in pdf.

Cloverleaf Enterprises, Inc. v. Maryland Thoroughbred Horsemen’s Assoc., Inc. (Maryland U.S.D.C.)

Filed: August 6, 2010
Opinion by Judge Richard D. Bennett.

Held: A party’s mere acquiescence in another party’s illegal scheme is sufficient to create a conspiracy in violation of Section 1 of the Sherman Act.

Facts: Cloverleaf Enterprises, Inc. (“Cloverleaf”) owns a racetrack in Maryland that accepts horse racing wagers on live simulcast signals provided by other racetracks. The signals come from both Maryland and out-of-state racetracks. As required under federal and Maryland law, Cloverleaf obtained the consent of other Maryland racetracks and certain other groups before receiving the simulcast signals. The consent was in the form of a Cross-Breed Agreement (the “Contract”), pursuant to which Cloverleaf paid weekly fees in return for the right to accept wagers on the simulcast races.

Cloverleaf breached the Contract by failing to pay the required weekly fees. As a result, the other Maryland racetracks withdrew their consent to Cloverleaf receiving the simulcast signals of their own races and out-of-state races. This withdrawal of consent came just a few days before the Kentucky Derby, historically a significant source of revenue for Cloverleaf. Cloverleaf obtained a temporary restraining order enjoining the racetracks from withdrawing consent to the simulcast of out-of-state races, including the Kentucky Derby. Despite the TRO, the other Maryland racetracks communicated with out-of-state racetracks, including Churchill Downs (home of the Kentucky Derby), urging them to terminate simulcast signals.

Cloverleaf filed a complaint against the other Maryland racetracks alleging, among other things, violation of Section 1 of the Sherman Act for conspiracy to effectuate a group boycott, both among the Maryland racetracks themselves and with out-of-state racetracks. The defendants moved to dismiss for failure to state a claim.

Analysis: The U.S. District Court for Maryland granted the motion with respect to the alleged conspiracy among the Maryland racetracks themselves. Pursuant to the Contract, if Cloverleaf failed to pay the weekly fees, the defendants could withdraw permission to send signals of their races. Therefore, the defendants’ actions were expressly permitted by the Contract.

The court denied the motion with respect to the alleged conspiracy between the Maryland racetracks and out-of-state racetracks. The defendants violated the TRO by urging out-of-state racetracks to terminate their simulcast signals, and most of the racetracks complied with the request. Even though the out-of-state racetracks may not have had anti-competitive motives, mere acquiescence in an illegal scheme is sufficient to create a conspiracy under the Sherman Act.

The full opinion is available in pdf.

Abdou-Malik Yacoubou Adam v. Wells Fargo Bank, N.A. (Maryland U.S.D.C.)

Filed: July 28, 2010

Opinion by Judge J. Frederick Motz


Held: A complaint alleging alleging the defendant harassed the plaintiff with dozens of phone calls every week states a claim for strict liability for malicious conduct under the Fair Debt Collection Practices Act.


Facts: The plaintiff owned a property with a mortgage serviced by the defendant. In June 2008, the defendant began charging $22.42 more per month after receiving updated tax information. The plaintiff disputed the increase and made payments under the original monthly rate. The plaintiff and the defendant agreed to a loan modification agreement in November 2008 regarding payments beginning in January 2009. However, the plaintiff's January payment was returned. Upon inquiry, the plaintiff was informed the loan modification agreement was null and void and he needed to sign another contract. The defendant rejected the plaintiff's February payment for an amount equaling two months payment under the loan modification agreement. The plaintiff then "began to receive regular harassing phone calls from the defendant threatening foreclosure."


The plaintiff sued for, among other things, compensation of injuries arising out of the revised loan modification agreement. The defendant moved under Rule 12(b)(6) to dismiss counts II and V of the plaintiff's complaint, alleging discrimination on the basis of race, religion or national origin and strict liability for malicious conduct.


Analysis: To state a "claim of discrimination in lending practices, a plaintiff must allege (1) that plaintiff is a member of a protected class who sought a loan for property; (2) that plaintiff qualified for a loan; (3) that a bank denied plaintiff's application; and (4) that other similarly situated applicants who were not in the protected classes received loans or were treated more favorably." The plaintiff's claim was dismissed because he failed to plead sufficient facts to permit a conclusion that discrimination was a factor.


With respect to the strict liability claim, the Court agreed with the defendant that the plaintiff's allegation of strict liability is not a recognized common law tort cause of action in Maryland. However, the Court, after providing some assistance to the pro se plaintiff's argument, permitted the plaintiff's claim that the defendant's alleged harassment states a plausible claim under the Fair Debt Collection Practices Act. The Act is a strict liability statute. And, it prohibits the defendant's use of repeated telephone calls with the intent to "annoy, abuse, or harass," allegations made in the plaintiff's complaint. The Court denied the defendant's motion to dismiss the plaintiff's strict liability count.


The full opinion is available in pdf.

Pennsylvania National Mutual Casualty Insurance Co. v. City Homes, Inc. (Maryland U.S.D.C.)

Filed: June 25, 2010
Opinion by Judge Catherine C. Blake.

Held: An insurance company will owe a duty to indemnify an insured for any judgment against it for negligence and/or negligent misrepresentation if the insured does not foresee or expect an injury resulting from a negligent act. The act of negligence is an “accident” under liability insurance.

Facts: An insurance company filed a declaratory judgment action claiming that it did not have a duty to indemnify and defend a rental property company and its president in a lawsuit filed by two minors who alleged they were exposed to lead paint. The rental property company counterclaimed and both sides moved for summary judgment.

The house in question had been a subject property in a “Lead-Based Paint Abatement and Repair & Maintenance Study.” It had undergone a lead-abatement intervention. During the time period in which the two minors lived in the house, the rental property company held commercial general liability insurance. After the rental property company sought indemnification from the insurance company, the insurance company argued that it did not owe a duty to defend or indemnify the rental property company because the underlying litigation did not involve an “occurrence,” as defined in the insurance contract.

The insurance company also argued that, even if the underlying case involved an “occurrence,” the contract’s exclusion for bodily injury that was expected or intended by the insured applies. The insurance company argued that the participation in the lead paint study showed the rental property company must have foreseen and expected the alleged injuries.

The insurance contract defined an “occurrence” as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Analysis: The court applied the standard set forth in Sheets v. Brethren Mutual Insurance Company, 342 Md. 634, 679 A.2d 540 (1996). In Sheets, the Maryland Court of Appeals held that an act of negligence constitutes an “accident” under a liability insurance policy and identified the relevant inquiry to be whether the insured actually foresaw or expected the injury resulting from the insured’s negligent act. By this standard, the court held that it could not be inferred from the rental property company’s participation in the study and its knowledge of the risks of lead poisoning that it foresaw the injuries sustained by the two minors.

Granting the rental property company’s motion and denying the insurance company’s motion for summary judgment, the court held that the insurance company will owe a duty to indemnify the rental property company for any judgment against it if the rental property company is ultimately found liable for negligence and/or negligent misrepresentation because the alleged were accidental and caused by an “occurrence.”

The full opinion is available in pdf.

Agora Financial, LLC, et al. v. Martin Samler

Filed: June 17, 2010

Opinion by Judge Beth P. Gesner.


Held: The Court held that the defendant did not (i) misappropriate plaintiff’s published investment recommendations since the plaintiff’s “hot news” misappropriation claim is preempted by federal copyright law, and (ii) unfairly compete with plaintiff by misleading consumers through false associations with the plaintiff and its investment recommendations.

Facts: Plaintiffs publish financial investment newsletters to paid subscribers, wherein financial analysts recommend broad investment strategies, identify specific investments and compile lists summarizing recommended investments.

Plaintiffs alleged that the defendant posted without authorization on his website the investment recommendations contained in plaintiffs’ publications and profited from theses postings by charging individuals access to his website.

Defendant’s website expressly disclaimed any affiliation, endorsement, or sponsorship by or with those analysts whose recommendations it reproduced or those analysts’ affiliated financial entities.

Plaintiffs submitted a Motion for Default Judgment after defendant failed to respond. The case was referred to the Court to submit a report and recommendation regarding the entry of default judgment and the appropriate amount of damages to be awarded to plaintiffs.

Analysis: On a Motion for Default Judgment, the Court must: (i) determine whether the unchallenged facts in plaintiffs’ complaint constitute a legitimate cause of action, and, if they do, (ii) make an independent determination regarding the appropriate amount of damages. The plaintiffs’ complaint failed to constitute a legitimate cause of action under either theory, and, thus, the Court did not address damages.
The central issue with respect to whether the plaintiff’s “hot news” misappropriation claim is legitimate is whether the claim is preempted by federal copyright law.

Copyright law protects author’s original works and grants the author the exclusive right to reproduce, distribute, perform, or display, which, in turn, “encourage[es] the creation of writings by authors” and to protect them rather than to reward them for their labor.

The common law “hot news” misappropriation theory “protects costly efforts to gather commercially valuable, time-sensitive information that would otherwise be unprotected by law.” International News Service v. Associated Press, 248 U.S. 215 (1918); See GAI Audio of N.Y. Inc. v Columbian Broad Sys., Inc. 27 Md. App. 172 (Md. Ct. Spec. App. 1975).

The main distinction between the two theories is that copyright seeks to protect “original” works, whereas “hot news” misappropriation seeks to protect “non-original” material, such as factual information.

Under Section 301, the Copyright Act preempts any state law (i) if the state rights are equivalent to any of the exclusive rights within the general scope of copyright . . . and (2) the work in which state rights are claimed falls within the subject matter of the copyright.

The Court analyzed the application of various tests used in connection with evaluating the preemption of the Copyright law by various state “hot news” misappropriation claims. The leading recent case involved Motorola publishing statistical information that is factual from NBA games in the Second Circuit. National Basketball Assoc. v. Motorola, Inc. 105 F.3d 841 (2d Cir. 1997).

In the NBA case, the Second Circuit adopted a test to evaluate whether a state “hot news” misappropriation claim is preempted by the federal Copyright law. The elements include: the plaintiff generates or gathers information at some cost or expense . . .; (ii) the value of the information is highly time-sensitive . . .;(iii) the defendant’s use of the information constitutes free-riding on the plaintiff’s costly efforts to generate or collect it . . . (iv) the defendant’s use of the information is in direct competition with a product or service offered by the plaintiff. . .; and (v) the ability of other parties to free-ride on the efforts of the plaintiff or others would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened . . . The NBA court held that satisfying these requirements would push a claim outside of the general scope of copyright and be allowed to proceed.

The Fourth Circuit has never applied or discussed the NBA test, but this Court has expressly rejected it in a similar case stating that none of the “extra elements” of the NBA test constitute an “act” that is distinquishable from “the right to reproduce, perform, distribute or display a work” and therefore does not fall outside of the “general scope requirement” of Section 301. See Lowry’s Reports, Inc. v. Legg Mason, Inc. 271 F.Supp. 2d 737 (D.Md. 2003).

In this case, plaintiffs expressly based their “hot news” misappropriate claim on the NBA test, and claimed that this Court had only expressed skepticism of the breadth of the NBA test.

The Court rejected the plaintiff’s interpretation and stated that even if we applied the NBA test, the plaintiffs would fail because the plaintiff’s had not set forth factual allegations in their Complaint or any proof in their subsequent filings from which the Court could conclude that the material at issue in this case is “factual information.”

The Court reconciled its decision with the NBA test by limiting the NBA test to circumstances in which the material at issue must be “factual information” for it to form the basis of a “hot news” misappropriation claim.

Here, the recommendations of plaintiffs’ analysts to invest in a company are not fact, but instead an “original” work, which, in plaintiffs’ case, entails “judgment” and “creativity.” Plaintiffs employ their writers to exercise their professional judgment in recommending investments. Plaintiffs are not seeking to protect an exclusive right to profit or otherwise benefit from the labor they expend in generating, gathering, and compiling the “factual information” underlying those recommendations, e.g., the daily performance of one of plaintiffs’ analysts’ recommended stocks.

The Court noted that the plaintiffs could probably bring a cause of action under federal copyright law, but not under the common law “hot news” misappropriation theory.

Further, plaintiffs’ complaint failed to support a claim under Section 43(a) of the Lanham Act, which prohibits the use of any word, term, name, symbol, or device, etc., likely to cause confusion, or to cause mistake, or to deceive as to the origin, sponsorship or approval of one’s goods or services, or commercial activities.

Defendant’s website expressly disclaims any affiliation, endorsement, or sponsorship by or with those analysts whose recommendations it reproduces or those analysts’ affiliated financial entities by stating that “[Defendant] is no way affiliated with or endorsed by [plaintiff’s writers] or [plaintiffs] nor do[es] [Defendant] claim to represent the performance of their publication.”

The Court ruled that such disclaimer was sufficient to debunk any such confusion, mistake or deceit.

A copy of the opinion is available as a pdf.

Dowd v. Dowd Holdings, Inc. (Cir. Ct. Mont. County)

Filed: July 12, 2010
Opinion by Judge Ronald Rubin

Held:

1. Absent an agreement to the contrary, a partner is not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership. Thus, the corporate general partner of a limited partnership is not entitled to a fee for managing the partnership’s business or disposing of its assets in the ordinary course of the partnership’s business.

2. Payments to the officers of the corporate general partner for services to the partnership are, de facto, payments to the corporate general partner.

3. A provision of the partnership agreement that requires that the partnership to indemnify the general partners for any claim arising out of the conduct of the partnership’s business, as long as they acted within the scope of their authority and in good faith does not insulate the corporate general partner from suit by a limited partner for breach of its contractual obligations under the partnership agreement.

4. In addition to damages, the plaintiff limited partners are also entitled to an award of prejudgment interest.

Facts:

The limited partnership was formed to own, operate, and ultimately sell an 82 acre investment property. After the sale, the corporate general partner withheld $427,250.00 of the proceeds from the sale to pay two of its officers for their efforts in selling the property. The limited partners sued for breach of contract, the contract being the partnership agreement. There was no contract between the corporate general partner and the partnership to pay compensation to the general partner for services rendered to the partnership.

Analysis:

This appears to be an instance where the corporate general partner attempted to "double dip." That is, the general partner attempted to take its share of partnership profits but, off the top, skim various fees allegedly incurred for services for the benefit of the partnership.

Practice Pointer:

If the intent of the parties is to merely split profits, the partnership agreement should have a provision that allows the entity to contract with affiliates of general partners or, in the case of an LLC, the managing members, only if the other partners or members agree. Alternatively, as is often the case, if it is actually intended that the business will contract with a partner or member, either the term of the contract should be agreed upon or the manner in which the terms are determined should be agreed upon.

A copy of the opinion is available in both PDF and Word.

Music Makers Holdings, LLC v. Sarro (Maryland U.S.D.C.)

Filed: July 14, 2010
Opinion by Judge Roger W. Titus

Held: A foreign defendant was not subject to personal jurisdiction in Maryland on the basis of correspondence sent to and received from the jurisdiction, maintenance of a website, advertising, or tortious conduct not intentionally directed into the State.

Facts: A Maryland plaintiff sued a foreign defendant for infringing upon its trademark. The defendant moved to dismiss for lack of personal jurisdiction. The plaintiff argued that the defendant was subject to personal jurisdiction because it transacted business in the State, caused tortious injury in the State, and engaged in a "persistent course of conduct in the State." The plaintiff pointed to five things that justified the exercise of personal jurisdiction, which the court addressed in turn:

Analysis:

The defendant sent cease and desist letters to the plaintiff in the State: The plaintiff argued that the defendant subjected herself to personal jurisdiction by sending the plaintiff cease-and-desist letters in Maryland about the mark. Relying on multiple cases from outside the jurisdiction, the court held that cease and desist letters, alone, are an insufficient basis. A defendant does not "transact business" within the meaning of the long-arm statute by sending letters to a purported infringer of its rights. Moreover, the maintenance of a suit based solely on such letters would “offend traditional notions of fair play and substantial justice."

The defendant received e-mails and phone calls originating from Maryland inquiring about the mark: The plaintiff argued that such contacts were sufficient to establish personal jurisdiction. The court held that these contacts did not establish that the defendant was transacting business or engaging in a persistent course of conduct in the State. Moreover, the contacts would not satisfy due process because they did not show that the defendant purposefully availed herself of conducting activities in the State.

The defendant's website: The court articulated the standard in the Fourth Circuit for establishing personal jurisdiction by means of a website. In the Fourth Circuit, the mere act of “placing information on the Internet is not sufficient by itself to subject that person to personal jurisdiction in each State in which the information is accessed.” Carefirst of Md., Inc. v. Carefirst Pregnancy Ctrs., Inc., 334 F.3d 390, 399 (4th Cir. 2003). Rather, the defendant “must have acted with the manifest intent of targeting Marylanders.” Id. at 400.

The Fourth Circuit has adopted a “sliding scale” model for website-based specific jurisdiction. Under this sliding scale, there are passive, interactive, and semi-interactive websites. At one end of the spectrum are situations where a defendant clearly does business over the internet. If the defendant enters into contracts with residents that involve the knowing and repeated transmission of computer files over the internet, personal jurisdiction is proper. At the opposite end are situations where a defendant has simply posted information on a web site. A passive web site that does little more than make information available is not grounds for the exercise of personal jurisdiction. The middle ground is occupied by interactive web sites where a user can exchange information with the host computer. In these cases, the exercise of jurisdiction is determined by examining the level of interactivity and commercial nature of the exchange of information.

The defendant's site provided information regarding her camp, a toll-free number, and a registration form which visitors could print and mail to defendant in New York. It also had a Google search box. It did not have an electronic application, a payment-by-credit card function, live chat, or an interactive e-mail form. Accordingly, the court deemed the site passive and an insufficient basis for personal jurisdiction.

The defendant advertised on camp marketing web sites: The plaintiff argued that this was a purposeful availment of the Maryland marketplace. The court concluded that, as with the defendant's own site, the third-party websites do not indicate that defendant “direct[ed] electronic activity into the State . . . with the manifested intent of engaging in business or other interactions within the state.” The generic advertising found on these third-party websites was insufficient to invoke personal jurisdiction.

The effects test: The plaintiff argued that the defendant's willful infringement of its rights satisfied the effects test. The effects test requires that a plaintiff show 1) an intentional tort, 2) suffered by the plaintiff in the forum, and 3) the defendant expressly aimed its conduct at the forum. The court found that the third requirement was lacking - there was no showing that the defendant aimed its conduct at Maryland.

Accordingly, the court dismissed for lack of personal jurisdiction.

The full opinion is available in pdf.

Nefedro v. Montgomery County (Ct. of Appeals)

Filed: June 10, 2010

Opinion by Judge Clayton Green, Jr.

Held: Montgomery County's ordinance that prohibits the acceptance of payment for fortunetelling ("Fortunetelling Ordinance") violates the First Amendment of the U.S. Constitution because it is regulates noncommercial protected speech and it is not narrowly tailored to promote a compelling Government interest.

Facts: Nick Nefedro wanted to open a fortunetelling business in Montgomery County. Nefedro filed suit in Circuit Court for Montgomery County after he alleged he was denied a business license from the Montgomery County Licensing Department because of the Fortunetelling Ordinance. The Circuit Court granted the County summary judgment and concluded that the Fortunetelling Ordinance was constitutional. Nefedro appealed to the Court of Special Appeals and the Court of Appeals issued a writ of certiorari.

Analysis: As an initial matter, the Court concluded that Nefedro had standing to bring the constitutional challenge because he was adversely affected by the Fortunetelling Ordinance considering he intended to open a fortunetelling business and would be subject to penalties under the Fortunetelling Ordinance if he did so.

Next, the Court decided whether the Ordinance violated the First Amendment. The Court agreed with Nefedro that the Ordinance violates Nefedro's right to freedom of speech under the First Amendment because it regulates speech and that regulation violates the First Amendment. The Court disagreed with the County's analysis that the Ordinance only regulates conduct, not speech, because it prohibits the payment of money for fortunetelling services, not fortunetelling itself, and therefore does not implicate the First Amendment. Citing to the Supreme Court and various state courts, the Court found that this was not a meaningful distinction. The Court explained that the County imposes a burden on speech when protected speech is made punishable for the exchange of payment.

The Court also refused to accept the County's assertion that fortunetelling is "inherently fraudulent" and therefore should not receive First Amendment protection. While the Court agreed that the First Amendment does not protect fraudulent statements, the Court was not convinced that fortunetelling always involves fraud. The Court noted that fortunetelling provides benefits to recipients, in the form of entertainment or information.

Further, the Court did not accept the County's argument that the Ordinance regulates commercial speech, which receives less scrutiny than laws restricting noncommercial speech. Speech is not commercial simply because it has an economic motivation. Because the purpose of fortunetelling is to provide a benefit to the recipient in the form of entertainment or information, it is not solely related to the economic interests of the speaker.

Lastly, the statute does not pass muster under the First Amendment for being "narrowly tailored to promote a compelling Government interest" because a less restrictive alternative would serve the Government's purpose. The Government's stated interest in the Ordinance was to combat fraud that apparently ensues from fortunetelling. The Court reasoned that a less restrictive, effective means of combating fraud would be to make fraud illegal, and Montgomery County and the state of Maryland already have such laws.

The full opinion is available in pdf.

McKinney v. Fulton Bank (Maryland U.S.D.C.)

Filed: June 21, 2010
Opinion by Judge Catherine C. Blake.

Held: A contract alone does not create a tort duty owed by a Bank to a Borrower in a loan transaction unless the Borrower is a vulnerable party or other special circumstances exist.

Facts: A borrower applied for a $930,000 loan to build a second home but entered into a $997,000 loan with a bank on April 27, 2006. The borrower claimed the bank "violated several federal and state laws by failing to make certain disclosures and issue documents on time" and the bank forced her to refinance a $67,000 second mortgage on her principal residence by unilaterally increasing the loan.

The borrower also claimed the deed of trust on her primary home granted her a three-day right to cancel the loan transaction and because she was not informed of this right she had an extended right to cancel. The borrower alleged this right was exercised by rescission letters sent on April 6, 2009 to the bank's counsel and president voiding any security interest of the bank. The bank foreclosed on the second home. The borrower claimed damages relating to costs of the loan and improvements made to the second home.

Analysis: The Court dismissed a majority of the claims alleging violations of the Truth in Lending Act, the Real Estate Settlement Procedures Act and the Maryland Consumer Protection Act due to expiration of the statute of limitations, the lack of a private cause of action under the statute and the borrower's failure to meet the heightened pleading standards.

The borrower also brought a negligence claim. While "the Maryland Court of Appeals has found that a bank did owe a consumer a duty of care in a loan transaction" in Jacques v. First Nat'l Bank of Md., 515 A.2d 756 (Md. 1986), the finding arose from more than just the contract. A contractual duty does not by itself become a tort duty. A duty must be imposed by law independent of the contract. "The Fourth Circuit has interpreted the holding of Jacques as limited to circumstances involving a vulnerable party." As the court neither found an independent duty nor considered the borrower to be vulnerable, the negligence claim was also dismissed.

The full opinion is available in pdf.

Employers Council on Flexible Compensation v. Feltman (4th Cir.)

Filed: June 21, 2010
Per curiam opinion

Held: Statutory damages may be awarded for violations of the Anticybersquatting Consumer Protection Act (the “ACPA”).

Facts: The Employers Council on Flexible Compensation (“ECFC”) registered the domain name “ecfc.org.” The Employers Council on Flexible Compensation, Ltd. (“ECFC Ltd”), an entity whose owners were involved in litigation with ECFC, registered the domain name “ecfc.com” and maintained a website that was nearly identical to “ecfc.org.”

ECFC filed a lawsuit against ECFC Ltd alleging, among other things, violation of the ACPA. The trial court awarded $20,000 in statutory damages on the ACPA claim. ECFC Ltd appealed, arguing that the trial court abused its discretion in awarding the damages.

Analysis: On appeal, the Fourth Circuit held that the trial court did not abuse its discretion in awarding the damages. Under the ACPA, an owner of a protected mark may bring an action against any person who has a bad faith intent to profit from that mark and registers a domain name that is confusingly similar to that mark. The owner may recover statutory damages (instead of actual damages) in the amount of not less than $1,000 and not more than $100,000 per domain name, as the court considers just.

The Fourth Circuit discussed several factors that shape the analysis of whether statutory damages may be awarded. These factors include exploitation of a close working relationship with the owner of a protected mark and conducting insufficient research as to whether the owner abandoned its rights in the marks.

The full opinion is available in pdf.

Catalyst Health Solutions, Inc. v. Magill (Ct. of Appeals)

Filed: June 2, 2010

Opinion by Judge Lynne A. Battaglia

Held: Unvested stock options are not protected wages under the Maryland Wage Payment and Collection Law.

Facts: A salesman was entitled to certain unvested stock options granted by his employer. The salesman tendered his resignation with the employer, because he accepted employment with a competitor company. He signed a separation and release agreement, which terminated his employment, eleven days before his stock options were scheduled to vest.

The employer filed a declaratory judgment action to, among other things, determine whether the employee had any claim with respect to the stock options. The trial judge entered judgment in favor of the employee in the amount of almost $850,000, stating that the employer granted the stock options for goals already achieved by the employee (even though the options had not vested).

Analysis: The Court of Appeals reversed. The Wage Payment and Collection Law (the “Act”) requires that employers pay all wages to employees for work performed before termination of employment. Maryland case law makes clear that the Act only protects wages if all conditions precedent to earning the wages have been satisfied. In the case at hand, a condition to earning the stock options was employment for a specific duration. Because the employee did not satisfy the condition, the Act did not protect the unvested stock options.

The full opinion is available in pdf.

Potomac Group West, Inc. v. Potomac Insurance Marketing Group, Inc. (Cir. Ct. Mont. Cnty)

Filed: April 28, 2010
Opinion by: Durke G. Thompson

Held: A trial court has discretion to allow a judgment creditor holding funds garnished to satisfy a judgment to retain the funds pending a retrial, even though the judgment was vacated on appeal.

Facts: A judgment creditor obtained a large award against a judgment debtor for fees and costs following a trial. The judgment creditor then garnished funds belonging to the judgment debtor while an appeal of the judgment was pending. The Court of Special Appeals subsequently reversed part of the judgment and vacated the award of fees and costs. The Court reasoned that the trial court should re-examine the issue of fees and costs after a trial on the remand issues.

The judgment debtor moved for release of the attached sums. He argued that, with no judgment, the attachments made to satisfy the judgment are void. The judgment debtor also argued that holding the sums would deprive him of property without due process of law.

The judgment creditor argued that the attachments in place could continue as an attachment before judgment on the basis that the judgment debtor was a non-resident and had committed fraud. The judgment creditor also argued that, if the sums were returned, they would never again be available for attachment. The judgment creditor emphasized that it was likely to prevail on the merits in the retrial, and, in any case, the economic consequence of the remanded portion of the case was dwarfed by the already-decided portion of the case. Therefore, the result of the overall case, even if the remaining portion were adjudicated in favor of the judgment debtor, would warrant an award of fees in excess of the amounts attached.

Analysis: The court agreed that the sums, if returned to the judgment debtor, would likely be dissipated. The court also agreed that the judgment creditor was likely to be entitled eventually to collect the sums based on the issues already decided and not appealed.

The court found that the judgment debtor was a non-resident of Maryland. Based on this, the court held that it had discretion to issue an attachment before judgment. The court opined that failing to preserve the status quo would result in harm or the ultimate loss of the monies attached. Because the monies were being held by the judgment creditor in escrow, the court found it "difficult to see why they should be released back to the [judgment debtor] to the presumed prejudice of the [judgment creditor]."

The court acknowledged that the judgment debtor made a powerful argument about due process. Nonetheless, the court opined that the argument did not withstand the foregoing logic and the express language of Maryland Rule 2-643 (c) which states, “Upon motion of the judgment debtor, the court may release some or all of the property from a levy if it finds that (1) the judgment has been vacated. . . ."

The court noted that the quoted language of the rule is discretionary in form and allowed a denial of the motion. The language of the rule drafters implies that an attachment may be maintained even though the underlying judgment is vacated. Gracefully acknowledging the precarious footing afforded by the facts, the court admitted, "It is upon this thin ice of logic and inference that this Court rests its decision and denies the Motion to Release Garnished Funds . . .."

The full opinion is available in PDF.

Corona Fruits & Veggies, Inc. v. Class Produce Group, LLC (Maryland U.S.D.C.)

Filed: May 25, 2010

Opinion by Judge Richard D. Bennett

Held: On an appeal from the Secretary of the US Department of Agriculture (“USDA”), the United States District Court for the District of Maryland denied Petitioner’s request to remand the case to a California State court for a number of reasons (including, but not limited to, res judicata and lack of authority) and granted Respondent’s motion for summary judgment because there was no genuine issue of material fact since the Petitioner made the same arguments in the USDA hearing.

Facts: This case is about strawberries, trucking, pulp temperatures and rejected produce. Petitioner is an owner of strawberry farm in California and entered into a contract with the Respondent, who is a distributor, for the sale of flats of strawberries. The Petitioner packaged the strawberries and loaded them on a truck operated by a third party carrier at its place of business in California for shipment Free-on-Board, and informed the carrier that the strawberries must be kept in an environment cooled to a temperature of 32 degrees Fahrenheit. The Respondent initially routed the carrier to a large third party retailer in Virginia who rejected the strawberries upon arrival.

The shipment was then re-routed to Respondent’s location in Jessup Maryland. Upon arrival, a USDA inspection was performed on the strawberries while they were on the truck and the inspection found 24% of the strawberries were in a defective condition. Based on these results, the Respondent rejected the strawberries. The Petitioner, however, upon learning of the rejection, notified the Respondent that the strawberries were hot and that the Respondent had a claim against the carrier rather than the Petitioner.

After its rejection, the Respondent routed the shipment to a retailer located in Philadelphia, which accepted the shipment at a reduced price. The Respondent never paid for any of the strawberries, nor did it receive any of the sale proceeds collected by retailer in Philadelphia.

Subsequently, the carrier sued the Petitioner in California state court for failure to pay the transportation costs; and the Petitioner filed an informal complaint with the USDA seeking reparations for the rejected strawberries. The Petitioner also filed a cross-complaint against the Respondent in the California state court for its failure to pay for the strawberries.

The USDA Secretary ruled that the Respondent was not liable to the Petitioner because the Petitioner failed to ship strawberries in suitable shipping condition. The Petitioner appealed the USDA Secretary’s ruling in the US District Court for MD and the California state court action was stayed pending a final ruling.

Analysis: With respect to Petitioner’s request to remand the case to the California state court where its cross claim was filed against Respondent, the Court denied the Petitioner’s motion. The Petitioner argued that the Court should remand the case to the California state court because it was within the Court’s “inherent prudential authority and the “the abstention doctrine” to remand the case so it could be consolidated with the California state case, and argued, that if the remand was denied, that the Court should adopt the discovery conducted and certain evidentiary sanctions that were imposed on the Respondent in the state court case.

In denying the Petitioner’s request, the Court determined that: (i) since the California court did not originate the case, the Court could not remand the case to the California court, (ii) there were no exceptional circumstances in the case that would compel the Court to decline to exercise its jurisdiction pursuant to any abstention doctrine, and (iii) there were no convincing reason for the Court to adopt the discovery rulings issued in the separate state court action. After making such determinations, the Court determined that the matter was properly before the Court and that the Petitioner had chosen to pursue redress through the USDA process rather than the completion of the state court proceeding, and that the resolution of the matter through the USDA process will result in res judicata as to the California state court action.

With respect to the Respondent’s motion for summary judgment, the Court granted the motion because the Petitioner failed to demonstrate a material issue of fact regarding the cause of the strawberries’ defective condition. Petitioner argued that it satisfied contractual obligations by ensuring that the strawberries were in suitable shipping condition at the time they were loaded in the truck, and maintained that the carrier should be responsible for their condition. Respondent alleges that the strawberries were in poor condition prior to being loaded onto the truck because they were overripe or otherwise damaged during the harvesting.

In the USDA hearing, the USDA ruled that the Petitioner bore the burden of showing both that the strawberries were in a suitable shipping condition at the time they were loaded and that the transportation conditions were abnormal. The USDA held that the strawberries were defective before loading even though the temperatures in the truck fluctuated during transport.

The Court reasoned that Petitioner’s declarations submitted by the Petitioner’s principles following the USDA hearing regarding the shipping of strawberries in general did not establish a genuine dispute regarding the condition of the strawberries during shipment. The Court found no material factual disputes from the Secretary’s original finding of fact, which is prima-facie evidence of the same on appeal, that the temperature conditions in transit did not adversely impact the strawberries. The Court also held that the Petitioner did not provide any evidence that the strawberries were properly handled prior to loading, and consequently, ruled in favor of the summary judgment motion since there was no genuine issue of fact existed as to the condition of the strawberries.

The full opinion is available in PDF.

Dickerson v. Longoria, et al. (Ct. of Appeals)

Filed: May 24, 2010

Opinion by Judge Clayton Green, Jr.

Held: Under general agency principles, agent did not have the requisite authority to bind principal to arbitration agreement. Trial court reversed.

Facts: Estate filed medical malpractice claim against nursing home. The nursing home sought to compel the estate to arbitrate the medical malpractice claim based on an arbitration agreement that was signed by the decedent’s agent when the decedent was admitted to the facility. The estate argued that it was not bound by the arbitration agreement. The circuit court found that the decedent not only knew that his agent acted on his behalf, but more importantly, he expected the agent to act for him and acquiesced to the agent’s decisions. Accordingly, the circuit court held that the agent signed the arbitration agreement while acting as decedent’s agent and the estate was therefore bound by the arbitration agreement.

Analysis: The Court held that Decedent’s agent did not have actual or apparent authority to bind the estate to the arbitration agreement. The agent was given authority to make healthcare and financial decisions on the decedent’s behalf. The decision to sign the arbitration agreement was not such a decision; instead, it was primarily a decision to waive the decedent’s right of access to the courts and his right to a trial by jury. The decision to sign a free-standing arbitration agreement is not a health care decision if the patient may receive health care without signing the arbitration agreement. In such a case, as here, the decision primarily concerns the legal rights of the patient with respect to resolving legal claims. The arbitration agreement explicitly stated that “the execution of this arbitration agreement is not a precondition to the furnishing of services to the Resident of the facility.” Accordingly, the agent’s decision to sign the arbitration agreement was not a health care decision and was therefore outside the scope of her actual authority. Further, there was no evidence of apparent authority conferred upon the agent as the decedent was not aware of the arbitration agreement when he was admitted to the facility.

In addition to general agency principles, the estate was not bound by the arbitration agreement as a third-party beneficiary, nor under the theories of equitable estoppel and unclean hands.

The estate could not be a third-party beneficiary to the arbitration agreement because, for the reasons cited above, the agreement was never actually formed. And, even if there was an enforceable arbitration agreement, a third-party beneficiary is bound only to the extent that it seeks to enforce the agreement. Here, the estate was suing for medical malpractice, which was separate and apart from any rights that would have been granted by the arbitration agreement.

The theories of equitable estoppel and unclean hands are equally inapplicable. The nursing home could not articulate any way in which it changed its position for the worse based upon the agent’s assertion that she was acting on the decedent’s behalf when she signed the arbitration agreement. Further, the nursing home did not assert any improper conduct by the agent.

The full opinion is available in PDF.