Lavine v. American Airlines, Inc. (Ct. of Special Appeals)

Filed: December 1, 2011

Opinion by Judge James Kenney III

Held: A "no oral modification" clause of a contract can preclude oral modifications where it constrains the authority of agents to act without written authorization from a corporate officer.

Facts: This case arises from a contract dispute between an airline and two airline passengers. Passengers booked airline tickets online and received an "E-Ticket Confirmation" email which included a link "Conditions of Carriage" providing the terms and conditions of the contract. The "Conditions of Carriage" stated in part, "[n]o agent, employee or representative of American has authority to alter, modify or waive any provision of the Conditions of Carriage unless authorized in writing by a corporate officer of American."

Due to a delay in the passengers outbound flight, an employee of the airline represented to passengers that a connecting flight would be provided. The outbound flight did not arrive at the connecting destination in time to board the connecting flight. The passengers were not provided a substitute connecting flight until the following day. The passengers contend that the airline employee's representation orally modified the terms of the contract.

Analysis: Even if an employee's representations amount to what would generally be an oral modification to a contract, the modification would not have been valid because of the specific language in the non-modification clause. The Court did not address whether or not the employee's representation otherwise would amount to an oral modification. The Court only addressed whether the employee had authority to make a modification.

[ed. Compare this result with the one in Hovnanian Land v. Annapolis Towne Ctr., 415 MD. 337, 1 A.3d 467 (2010), where the Court of Appeals held that a condition precedent may be waived by a party's conduct despite a non-waiver clause which required any waiver to be in writing.]

In Lavine, the Court held a non-modification clause of a contract which provides that no agent, employee or representative of the party has authority to alter, modify or waive any provision of the contract unless in writing by an officer of the party will withstand challenges that a contract has been orally modified, so long as the agent, employee or representative that made the oral modification did not have written authorization.

The full opinion is available in pdf.

Roger E. Herst Revocable Trust, et al. v. Blinds to Go (U.S.) Inc., et al. (Maryland U.S.D.C.)

Filed: October 26, 2011

Opinion by Judge Ellen Lipton Hollander

Held: When a tenant is contractually obligated to pay rent even after acts that could be considered termination of the lease as a matter of real property law, the damage principles of contract law apply and, in the absence of a lease provision with reasonable clearness to the contrary, a defaulting tenant is entitled to the benefit of any excess rent realized from reletting the premises.

Facts: Crest Net Lease, Inc., as landlord, entered into a triple net commercial Lease with Blinds to Go (U.S.) Inc. ("BTG"), as tenant, on September 21, 2011 and entered into a Guaranty with Blinds to Go Inc. ("BTG's Parent"), the parent company of BTG, on the same date for the guaranty of the obligations of BTG under the Lease. On August 21, 2011, Crest Net Lease, Inc. assigned all of its right, title and interest in the Lease and Guaranty with the Blinds to Go entities to the plaintiffs, Roger E. Herst Revocable Trust, Dr. Roger E. Herst, Trustee of the Roger E. Herst Revocable Trust, and Joshua R. Herst (collectively, the "Plaintiffs"). Under the terms of the Lease, all rent was due and payable on the first day of each calendar month during the term and there was a late charge of 3% of the monthly rent each time the rent was late and interest also accrued on all amounts that had not been paid to the landlord at the rate of 5.25%. On or about August 31, 2009, BTG abandoned and vacated the leased premises and sent a letter to the Plaintiffs on the next day informing the Plaintiffs of the decision to vacate the leased premises. In its letter, BTG informed the Plaintiffs that it would cease paying any and all rent and additional rent otherwise payable under the Lease and suggested that it was in the best interests of the parties to terminate the Lease due to the rental rates under the Lease being well below market rates and permit the Plaintiffs to directly recover a higher rent from a new tenant. Following receipt of the BTG's letter, the Plaintiffs sent a letter to BTG informing it the the Plaintiffs "fully rejected the unilateral termination" by BTG of the Lease and would hold BTG responsible for payment of all rent and expenses set forth in the Lease through the expiration date of the Lease. Subsequent to sending the letter to BTG, the Plaintiffs also entered into an Exclusive Leasing/Sales Agreement with StreetSense Retail Advisors, LLC ("StreetSense") to authorize StreetSense to act as the Plaintiffs' agent to obtain a new tenant of the leased premises. In attempting to find a tenant, StreetSense reached out to KLNB to see if any of KLNB's clients would be interested in the premises. BTG also contacted Bialow Real Estate, LLC ("Bialow") in an effort to find a new tenant for the leased premises. On November 30, 2009, Bialow sent KLNB, on behalf of Vitamin Shoppe a letter for intent to express Vitamin Shoppe's interest in the premises. The letter of intent eventually made it to the Plaintiffs and was countersigned by the Plaintiffs on December 7, 2009. On August 3, 2010, the Plaintiffs and Vitamin Shoppe executed a lease agreement (the "Vitamin Lease") for the premises with an initial term of 10 years. The premises were delivered to Vitamin Shoppe on September 1, 2010. Because the Vitamin Lease contained provisions that gave the tenant a build-out period of 90 days in which to make tenant improvements to the premises for purposes of getting the premises ready for Vitamin Shoppe's business and a building improvement allowance of up to $87,500. The Vitamin Lease's term began on December 1, 2010 and , unlike BTG's Lease, was not a triple net lease. For delivering Vitamin Shoppe as a tenant and because there were three brokers involved, StreetSense, KLNB and Bialow, the Plaintiffs' paid commission equal to $81,218.

The Plaintiffs filed suit against in the Fall of 2010 against BTG and BTG's Parent (collectively, the "Defendants") alleging breach of the Lease and the Guaranty and seeking recovery for damages incurred as a result of such breaches, including unpaid rent from the Defendants for a total of 23 1/3 months, representing the amount of time from Defendants' breach in September 2009 until when the Plaintiffs received rent payments from Vitamin Shoppe, late charges for unpaid rent, repayment of real estate taxes and utilities, reimbursement of brokers' commission, reimbursement for costs with entering into the Vitamin Lease, administrative costs, litigation costs, and prejudgment interest. In response to the claims of Plaintiffs, the Defendants challenged the reasonableness of the Plaintiffs' efforts in mitigating their losses, the reasonableness of some of the concessions made in connection with the Vitamin Lease, the necessity of the build-out period and the reasonableness of the tenant improvement allowance, the administrative charge, litigation expenses regarding zoning issues for Vitamin Shoppe's signage and brokers' commission. The Defendants also argued that the Plaintiffs' claimed damages should be prorated to account for the time period that the Vitamin Lease extends beyond the term of the BTG's Lease and that their liability should be offset by the surplus rent that the Plaintiffs are receiving as a result of the rent being charged under the Vitamin Lease being much more than that under BTG's Lease.

Analysis: Because the parties stipulated as to the amount of unpaid rent and the amount of late charges, the Court turned first to addressing the Defendants' arguments that the length of time it took the Plaintiffs' to execute a lease with Vitamin Shoppe was unreasonable. The Court noted that while the Defendants' claim that the Plaintiffs received four originals of the lease for execution from Vitamin Shoppe's attorney on May 15, 2010 but did not sign the lease until August 3, 2010, the Defendants failed to provide any evidence indicating whether the lease that was finally signed was identical to the lease that was delivered in May. Even with such evidence, the Court explained that it would not have mattered because not only did the exact terms of the lease provide that the projected delivery date of the premises would be on September 1, 2010 but that it was clear from the outset that the lease would not be executed until the end of 2010 due to the letter of intent expressing Vitamin Shoppe's desire for the premises to be delivered "on or about January 3, 2011." The Court then quickly dismissed the Defendants' argument that the inclusion of a 90 day build-out period was unreasonable in light of BTG having been granted a 180 day build-out period under its lease with the Plaintiffs. While the Court found the number of hours claimed by Dr. Herst for purposes of performing administrative services as a result of the Defendants' breach, the Court found the hourly charge of Dr. Herst to be commensurate with market rates and awarded the Plaintiffs' recovery of the administrative charges due to them being expressly allowed under the terms of the Lease, less the number of hours the Court found to be excessively high or covered as a result of professionals hired by the Plaintiffs. Similarly, to the other challenges of Defendants' questioning the reasonableness of the brokers' commission, the title fees, the litigation fees expended to unsuccessfully deal with a zoning issue for Vitamin Shoppe's signage, the Court found all such charges to be reasonable, within the ability of the Plaintiffs' to recover as a result of Defendant's breach and within market rates.

The Court next turned its attention to the argument of Defendants' that the damages should be prorated to account for the additional months of tenancy obtained by the Plaintiffs as a result of the term of the Vitamin Lease being longer than the remainder of BTGs' Lease. As support for their argument, the Defendants pointed to Wilson v. Ruhl, 277 Md. 607 (1967), and the Maryland Court of Appeals approval of the proration of a broker's commission that a landlord paid to procure a replacement tenant. The Plaintiffs argued that Wilson was inapplicable because it concerned a residential lease and not a commercial lease and, even if it applicable to commercial leases, it was overruled by Millison v. Clarke, 287 Md. 420 (1976). The Court first noted that Wilson's holding regarding the proration of a brokerage fee to exclude that portion of the brokers' commission that is for a term in excess of the breaching tenant did differ for residential and commercial leases and then explained that Millison only overruled dicta of Wilson that suggested that a landlord's reletting of premises for a term longer than the original term of the lease was the landlord accepting the surrender of the the premises by the original tenant and not the proration holding. The Court also found that while the express language of the Lease obligated BTG to pay the brokers' commission as one of the listed items that can be incurred in reletting the premises if there is a breach by BTG, it did not warrant disregarding the holding of Wilson. Therefore, with respect to the brokers' commission, the Court held that to the extent that amount requested for the brokers' commission would be reduced to allocate to the Plaintiffs that amount of the brokers' commission that was applicable solely to Vitamin Shoppe's tenancy beyond the balance of the remainder of BTG's tenancy under the Lease.

Turning to the Defendant's next argument, the Court addressed Defendants' argument that they were entitled to setoff the damages owed by them by the amount of the surplus rent that has already been received, and that will be received, by the Plaintiffs as a result of Vitamin Shoppe's rent under the Vitamin Lease being higher than BTG's rent under the Lease. The Plaintiffs' argued that the Defendants were not entitled to a deduction for such surplusage. Because neither of the parties cited any cases, the Court reviewed secondary sources and cases from other jurisdictions regarding Defendants' argument. The Court found the New York case Hermitage Co. v. Levine, 162 N.E. 97 (N.Y. 1928), to be particularly instructive. In Hermitage, the court held that "in the absence of a lease provision to the contrary, a defaulting tenant was entitled to the benefit of any excess rent realized from reletting." The court also acknowledged that a contract damages provision could be drafted in such as way to not require the landlord to account for surplus. In referencing the terms of the Lease, the Court noted that Section 17.2.3 of the Lease expressly authorized the Plaintiffs to relet the premises without terminating the Lease and required the Plaintiffs to apply any rent received by the Plaintiffs "to the account of [BTG], not to exceed [BTG's] total indebtedness to [Plaintiffs]". Because the express terms of the Lease required the Plaintiffs to apply any amount received from reletting to the account of the Defendants, the Court held that the Defendants were entitled to set-off as a result of the surplus rent being received, but that the surplus amounts had to be adjusted to account for present value of future surplus and, in light of the fact that BTG's Lease was a triple net lease and the Vitamin Lease is not a triple net lease, the amounts that would have been paid for taxes utilities and maintenance by the Defendants.

Lastly, the Court addressed the issue of prejudgment interest. Referencing Fourth Circuit precedent that applied state law to questions involving prejudgment interest and Maryland precedent setting prejudgment interest at 6% per annum unless another percentage is established by contract or statute, the Court held that the Plaintiffs would be entitled to prejudgment interest in the amount of 5.25% per annum, as set forth in the Lease, for unpaid rent and late charges beginning on the date due, but were only entitled to pre-judgment expenses for all other awards of damages, including the brokers' commission, the attorneys' fees, the administrative costs and any other amounts from the date of the Court's order until the date judgment was entered against the Defendants. The Court explained that pre-judgment interest was allowable for the unpaid rent and late charges from the date due because those amounts had previously become due and were capable of precise calculation from the date that they were due. The other damages could not have been determined precisely as of any date certain prior to the ruling of a trier of fact and therefore could not begin running interest until they became due and certain as a result of the resolution of the case.

The full opinion is available in PDF.

Stalker Brothers, Inc., et al. v. Alcoa Concrete Masonry, Inc. (Ct. of Appeals)

Filed: October 24, 2011
Opinion by Judge Joseph F. Murphy Jr.

Held: The Maryland Home Improvement Law does not render a contract between a home improvement general contractor and an unlicensed subcontractor unenforceable. The statute was intended to protect the public under contractor-owner contracts and not contracts between contractors who engage in arms-length transactions with one another.

Facts: Alcoa Concrete Masonry, Inc. ("Plaintiff") was an unlicensed subcontractor providing work for Stalker Brothers, Inc. ("Defendant") on contract. The two companies did business together from 2004 to 2007. Payments were regular at first but the Defendant started to miss payments in 2005 and after an attempt to reconcile the amount due among themselves the Defendant began to miss payments again, eventually refusing to pay the Plaintiff altogether.

The Plaintiff contended that they had been intentionally misled by the Defendant and that the Defendant had signed Releases of Liens stating that all subcontractors had been paid for the work when in fact the Defendant knew they had not paid the Plaintiff thereby gaining access to funds not rightfully theirs. As a defense the Defendant claimed that the Plaintiff had preformed this residential home improvement work while an unlicensed subcontractor in Maryland and as such contracts made by such an unlicensed subcontractor were illegal and unenforceable under the Maryland Home Improvement Law.

Analysis: In broad agreement with the opinion of the Court of Special Appeals [see HERE for a prior blog entry regarding the Court of Special Appeals opinion] the Court of Appeals applied the "revenue/regulation rule". Using this rule the Court distinguished between a contract between an owner and contractor as a contract covered under the Maryland Home Improvement Law, and a contract between a contractor and a subcontractor as not covered under this statute. The Court found that the purpose of the Maryland Home Improvement Law is to protect the public and not a method by which contractors could escape liability for past due amounts due to subcontractors that were unlicensed at the time they performed the contract.

The full opinion is available in PDF.

Ramlall v. Mobilepro Corp. (Ct. of Special Appeals)

Filed: October 28, 2011

Opinion by: Judge Albert J. Matricciani, Jr.

Held: A corporate veil may only be pierced to prevent fraud or to enforce a paramount equity. Without precedent from the Court of Appeals, the Court of Special Appeals declines to guess what a paramount equity may be. In addition, a "forward triangular merger," by which an acquiring company secures the benefit of limited liability for a target company's debts, is not fraudulent so as to create grounds for piercing the corporate veil.

Facts: The plaintiff was hired by a company to negotiate a billing dispute among the company and and its telephone service provider. Before the plaintiff could collect his fee, the company that hired him (the "Dissolved Company") merged with another company (the "Surviving Company") and was dissolved. The Surviving Company was wholly owned by a parent (the "Parent"), and had been formed for the purpose of merging with the Dissolved Company.

Neither the Surviving Company nor the Parent paid the plaintiff's fee. The plaintiff sued them both - the Surviving Company as the successor to the Dissolved Company, and the Parent as an entity responsible for the debts of the Surviving Company. The Circuit Court granted the Parent's motion for summary judgment. After a trial of the claim against the Surviving Company, the Court granted a motion for judgment in favor of the Surviving Company on the ground that a transaction disclosure agreement stated the terms by which the plaintiff was to be paid, and the plaintiff was not entitled pursuant to those terms. The plaintiff appealed.

Analysis:
Summary Judgment for the Parent: The plaintiff argued that the Parent exercised sufficient control over the Surviving Company to justify piercing the corporate veil. Referencing the Court of Appeals' decision in Bart Aconti & Sons, Inc. v. Ames-Ennis, Inc., the Court affirmed the black-letter principle that it may pierce the corporate veil only based on proof of fraud or necessity to enforce a paramount equity.

In response to the plaintiff's argument that his claim was a paramount equity, the Court noted that "notwithstanding its hint that enforcing a paramount equity might suffice . . ., the Court of Appeals has not elaborated upon the meaning of this phrase or applied it in any case of which we are aware." Accordingly, "with no precedent approving this extraordinary remedy," the Court declined to pierce the corporate veil on that ground. Regarding alleged fraud, the Court rejected the contention that the merger scheme (a "forward triangular merger") was a fraudulent action.

Judgment for the Surviving Company: The Plaintiff argued that the Dissolved Company owed him money based on the benefit he provided in negotiating its dispute. In addition, if the Dissolved Company owed him money, then after the merger, the obligation to pay became the Surviving Company's obligation.

The Court discussed in detail the case law and statutory law providing that, when there is a merger, "the successor is liable for all the debts and obligations of each non-surviving corporation." Accordingly, any obligation of the Dissolved Company to pay the plaintiff was an obligation of the Surviving Company. The question remained, what was that obligation?

Regarding the obligation, the Court found that both sides presented conflicting evidence concerning the terms of the oral agreement to pay. In addition, there was additional evidence to be adduced during the defendant's case. The Court held that, even though it was a bench trial, it was a mistake for the trial court to rely upon the transaction's disclosure statement as dispositive of the disputed oral agreement. In doing that, the trial court disregarded substantial evidence that the statement was not an accurate representation of the agreement.

Accordingly, the Court vacated the judgment in favor of the Surviving Company and remanded for the trial court to receive all the evidence and determine the terms of the agreement.

The full opinion is available in .pdf.

Jackson v. Dackman (Ct. of Appeals)

Filed: October 24, 2011

Opinion by: Judge John C. Eldridge

Held: Immunity provisions of the Reduction of Lead Risk in Housing Act which, under specific conditions, grant immunity to a rental property owner from personal liability suits arising from lead paint poising, are invalid under Article 19 of the Maryland Declaration of Rights.

Facts: The case involves two rental properties, which were owned and maintained by defendants. In January 2007, plaintiff and her daughter moved into the first property when the daughter was one year old. When the lease was first executed, the tenants failed to note any defective conditions. Nevertheless, paint chipped and flaked throughout the apartment, which plaintiff’s daughter ingested, causing her to suffer from lead poising. In February 1999, plaintiff and her daughter moved to the second property, which had been inspected pursuant to the Reduction of Lead Risk in Housing Act and represented as lead-free. However, similar to the first property, paint chipped and flaked throughout the apartment, which the daughter again ingested. Plaintiff brought suit against the defendants and sought damages based on her daughter’s severe and permanent brain injuries allegedly resulting from ingestion of lead-based paint.

Analysis: Section 6-828 of The Reduction of Lead Risk in Housing Act grants immunity from personal injury suits to a rental owner who has complied with the statute, unless notice is given to the owner and the owner has been given the opportunity to make a qualified offer to the person at risk or to a parent or legal guardian of a minor. The statute sets forth specific blood-lead levels at which the tenants are required to give notice to rental owners. The Act also caps the maximum amount payable under a qualified offer to $17,000, which includes medical and relocation expenses. The Act provides that acceptance of a qualified offer releases the owner from all potential liability. It further states that if the qualified offer is rejected “[a]n owner of an affected property is not liable, for alleged injury or loss caused by ingestion of lead by a person at risk in the affected property.”

An issue presented to the court focused on whether the immunity provisions in the Act were invalid under Article 19 of the Maryland Declaration of Rights. Article 19 establishes the right to a remedy for a person who experiences an injury to person or property. The Court explained that the remedy may be found at common law, or substituted by the legislature through statute. The general inquiry, under Article 19 jurisprudence, “is whether the abolition of the common law remedy and substitution of a statutory remedy is reasonable.” Article 19 permits the legislature to impose a reasonable limit upon non-economic damages recoverable in tort cases. The Court, while reaffirming that some restrictions upon judicial remedies have been upheld -- including certain well-established immunities, ultimately held the immunity provisions of the Act to be unreasonable.

The immunity granted by the Act was not a well-established immunity in personal injury actions because it did not exist prior to the enactment of the statute in 1994. Under the Act, the only remedy offered in substitution for a personal injury action is a qualified offer by the owners which is accepted by a “person at risk, or a parent or legal guardian of a minor who is a person at risk.” The Court noted that the statute did not provide a remedy where no qualified offer was made. In addition, under the statute, the maximum compensation that may be offered is $17,000, which the Court deemed “minuscule” for a child who is found to be permanently brain damaged. Thus, the Court reasoned, “the remedy which the Act substitutes for a traditional personal injury action results in either no compensation (where no qualified offer is made or where a qualified offer is rejected) or drastically inadequate compensation (where such qualified offer is made and accepted).”


Furthermore, the Act has no exception to the owner’s immunity in the situation where an injured child reaches the age of majority and attempts to bring, in his or her own name, a personal injury action against the owner. The Court held, that because no adequate remedy was substituted for the grant of immunity, the immunity provisions of the Act were unreasonable and therefore invalid under Article 19. However, the Court found that the invalid provisions were severable from the rest of the statute, ultimately upholding the Act.

The full opinion is available in pdf. 

Suntrust Bank v. Goldman (Ct. of Special Appeals)

Filed: September 30, 2011
Opinion by: Judge James R. Eyler

Held: The prevailing party in a suit for breach of a line of credit agreement may only be awarded attorneys' fees in the amount of fees actually incurred (including future fees that can be proven with certainty), notwithstanding contract language allowing for recovery of a greater sum measured as a percentage of the principal loan amount.

Facts: A borrower entered into a line of credit agreement with a bank. The agreement contained a clause that stated that the borrower would be responsible to pay any costs of collection for failure to pay on the loan, including 15% of the principal as attorneys' fees or reasonable attorneys' fees. The borrower defaulted and the bank sued. The borrower failed to answer, and the trial court awarded the bank an order of default for the principal amount due and interest. The bank also asked the court for attorneys' fees in the amount of $60,206.00, or 15% of the principal. The court denied this request and only awarded attorneys' fees in the amount of $3,258.30, or the actual fees incurred to date plus costs. The bank filed a motion to revise judgment to award attorneys' fees as provided in the contract, which the trial court denied. The bank appealed.

Analysis: The Court of Special Appeals affirmed.

The bank argued that it sought the 15% fee to cover actual fees, as well as fees it may incur in the future as a result of efforts to enforce the judgment. The bank pointed out that if it were denied that fee, it would not be able to sue to enforce the provision after final judgment due to the doctrine of merger.

The Court stated that attorneys' fee provisions are in the nature of indemnity agreements. The Court explained that "Maryland law limits the amount of contractual attorneys fees to actual fees incurred, regardless of whether the contract provides for a greater amount." The Court distinguished this case from Webster v. People's Loan, Sav. & Deposit Bank of Cambridge, 160 Md. 57 (1976) that contained language by the Court of Appeals that supports the bank's claim for the 15% attorneys' fee then later crediting the appellees with the amount of fees not actually incurred. This Court distinguished Webster because it dealt with a judgment by confession when confessed judgments were entered by the clerk of the court based on the terms of the underlying note. Now, the Court explained, the procedure is different. Md. Rule 2-611, amended in 2010, includes a new section (b) which "requires a court to review a confessed judgment for factual and legal validity before the clerk may enter the judgment." Therefore, judicial review of confessed judgment is now done at the outset where the reviewing court can make a determination as to the reasonableness of the attorneys' fees.

The bank explained that it should be able to claim un-incurred fees, subject to later credit because the merger doctrine does not allow a party to seek post-judgment requests for attorneys' fees for which the court has already entered judgment. The Court discusses various ways to avoid the merger bar, including for the parties to state their intent in the contract that the fee provision shall not merge into the judgment (without specifying how this would be done).

The Court concluded that in order to collect both incurred fees and future fees, the requesting party will need to put on evidence of fees that it will certainly incur in the future, as well as those fees actually incurred at that time, as long as they are reasonable. Because the bank presented no evidence as to any agreement to pay attorneys' fees other than on an hourly basis and no evidence to provide fees certain to be incurred in the future, the Court concluded that the trial court had properly awarded only incurred attorneys' fees to the bank.

The full opinion is available in pdf.

In re Nationwide Health Properties, Inc. S'holder Litig. (Cir. Ct. Balt. City)

Filed: May 25, 2011

Opinion by: Judge Stuart R. Berger

Held: When stating a claim for breach of fiduciary duty by the board of directors in a stock-for-stock merger, the duty of profit maximization under Shenker v. Laureate Education, Inc. does not apply.

Facts: The Board of Directors (the Board) of Nationwide, a publicly traded Maryland corporation and REIT with investments primarily in healthcare property in the United States, sought the advice of financial advisers on potential merger opportunities. Over a period of three months Nationwide actively pursued a deal with two of these opportunities. After some back-and-forth with the two potential acquiring companies the Board went with the company that offered them a firm, but slightly lower, price than the other.

Analysis: Plaintiffs attempted to use Shenker v. Laureate Education, Inc. to impose a duty of maximizing shareholder value on the Board. The Court distinguished the "cash-out" merger in Shenker as a different transaction from that of a "stock-for-stock" merger. In Shenker the duty of profit maximization was placed upon that board since the transaction was a "cash out" merger, where shareholders are given cash for their stocks, potentially forcing minority shareholders to accept a cash payment, effectively eliminating their interest in the target company and leaving them with no interest in the acquiring company. In a "stock-for-stock" merger, as is the case here, the current shareholder's equity is exchanged at a fixed conversion rate for shares in the acquiring company. The profit maximization standard may only be applied in a "cash-out" merger situation due to the finality of the decision by the board in such a merger as opposed to the current situation where shareholders will maintain an interest in the merged company. The Court noted that if it were to adopt the plaintiffs' reasoning, then there would be a duty of profit maximization in every merger, in direct opposition to existing case law.

The plaintiffs also argued the "stock-for-stock" purchase is effectively a change in control. The Court disagreed and cited the Delaware Supreme Court, which held where "control of both [companies] remains in a large, fluid, changeable and changing market, "directors do not have to obtain the highest possible value for shareholders since the asset remains liquid and easily sold or transferred in the broader market. A "stock-for-stock" merger is essentially a managerial function and there is no duty to maximize shareholder value, as opposed to a cash-out merger where this duty may be imposed. Further, Maryland corporation law reflects the same principle, "[A] stock-for-stock merger will not be a change of control..." (Hanks, Maryland Corporation Law § 6.6(b)). As the plaintiffs did not sufficiently plead facts supporting their change of control argument, the Court did not impose a duty of profit maximization on the Board.

The Court stated the proper analysis of the merger is under the Maryland Business Judgment Rule. To rebut the presumption, the plaintiffs needed to introduce evidence of director self-interest or self-dealing, or that the directors lacked good faith or failed to exercise due care. The allegations in the complaint did not allege a fraud, but rather self-dealing and negligence leading to substantially lower consideration for their shares. The plaintiffs did not show that interests such as early vesting of stock options influenced a majority of the Board in approving the transaction. The allegations of a breach of acting in the interest of the corporation must establish a link between the material benefit and the Board's decision to approve the merger transaction - absent this, allegations of self dealing are conclusory.

A breach of good faith is not met when the Board is presented with two rational options and chooses one that turns out to be less advantageous than the other. To succeed in showing a lack of care, the plaintiffs must show gross negligence was committed by the Board. Courts have held that boards are justified in accepting a lower but more firm offer over one that is higher but more speculative and that a board may act decisively to preserve an offer. The Court did not find such gross negligence was committed by the Board and the claim was dismissed with prejudice.

Lastly, the plaintiffs alleged a breach of the duty of candor. The Court found the complaint failed to state how any of the alleged omissions were material because the plaintiffs made no attempt to explain how the additional information they sought would alter the "total mix" of information made available in the lengthy report provided to shareholders. Accordingly, the plaintiff's disclosure claims were dismissed with prejudice.

The full opinion is available in pdf.

Oliver v. Crump (Maryland U.S.D.C.)

Filed: September 15, 2011

Opinion by: Judge Ellen Lipton Hollander

Held: In a suit alleging breach of fiduciary obligations of directors of a corporation, a Maryland court may exercise personal jurisdiction over out-of-state directors of a Maryland corporation that conducts its business operations in Maryland.

Facts: Defendants were directors, officers and employees of a Maryland corporation. Plaintiff alleged defendants acted in a course of misconduct. All of the defendants reside in Delaware.

Analysis: A court exercising personal jurisdiction over non-resident defendants does not violate the due process clause of the U.S. Constitution when the defendants have "minimum contacts" in the state and "the exercise of jurisdiction based on those contacts is constitutionally reasonable." The Court applied the logic of Pittsburgh Terminal Corp. v. Mid Allegheny Corp., 831 F.2d 522 (4th Cir. 1987), which involved a West Virginia corporation and directors who lived in the State of Virginia.

In Pittsburgh Terminal, the Fourth Circuit held "the acceptance of a directorship constitutes minimum contacts in a derivative suit." The Court also found minimum contacts because, among other reasons, (a) Maryland law, like West Virginia law, provides the business and affairs of the corporation shall be managed under the direction of a board of directors, (b) directors participate in business decisions that have a primary effect in the forum state and (c) by becoming directors, the defendants purposefully availed themselves of the privilege of doing business in that state.

Turning to the constitutional reasonableness portion of the due process test, the Court cited Pittsburgh Terminal, which noted the factors of the case made the "assertion of jurisdiction more reasonable." The Court agreed. As in Pittsburgh Terminal, the defendants live in a neighboring state. Maryland has a strong interest in providing a forum to hear a claim alleging wrongful acts by the directors of one of its domestic corporations. And, according to the Court, while defendants receive many benefits of the legal fiction of a corporation, requiring "them in turn to shoulder one of the few burdens of such fiction" did not seem unfair.

The opinion is available in pdf.

Hospitality Partners, LLC v. Brewmasters Hotel, LLC (Mont. Co. Cir. Ct.)

Filed: September 12, 2011
Opinion by Judge Ronald B. Rubin

Held: A defendant cannot attempt to terminate a contract for cause under one termination provision and, upon failing to justify the termination and losing a jury trial, invoke a different termination provision (that it did not comply with) to argue that the plaintiff's "expectation interest" in the contract, and thus its claim for damages, must be limited.

Facts: A hotel management contract had multiple clauses providing for termination, including termination for "no cause" whereby the terminating party would owe only 6 month's notice. The defendant terminated the contract for cause, on the ground that the plaintiff was grossly negligent in performing. The plaintiff sued and won a $2.8 million damages verdict from a jury. The defendant moved for a new trial on the ground that, had it terminated the contract for no cause, it would have owed only six month's notice. The defendant argued that, because it could have terminated for no cause upon six month's notice, the plaintiff's expectation interest in the contract was limited to six month's worth of damages.

Analysis: The court held that the defendant was not entitled to invoke the "no cause" termination clause after attempting, and failing, to terminate the contract pursuant to a different clause. The court distinguished the case from other Maryland cases where a plaintiff's expectation interest was deemed limited to the amount of notice it was entitled to receive before termination of a contract: Cottman v. Maryland Dep't of Natural Res., 51 Md. App. 380 (1982) and Storetrax.com, Inc. v. Gurland, 168 Md. App. 50 (2006).

The court pointed out that the defendant had not invoked or attempted to comply with the requirements of the "no cause" provision. The contract was a complex set of interlocking promises and promised benefits. The parties clearly had the expectation that, absent good faith compliance with the express terms of the available termination provisions, the contract would last ten years. The defendant could have availed itself of the "easy out" of terminating for no cause if it had given notice and paid a small fee. Instead, the defendant chose another path and refused to give notice or pay the fee. After failing to justify its termination, the defendant was not entitled to invoke a different termination provision in order to cap its exposure to damages proven at trial.

The full opinion is available in .pdf.

Hayes v. Autocorp, LLC (Mont. Co. Cir. Ct.)

Filed: July 13, 2011
Opinion by Judge Ronald B. Rubin

Held: A bank that elected to accept rather than contest the improper dishonor of its customer's check and to proceed against the customer for sums "charged back," waived its right to recover against the dishonoring bank after its attempt proved unsuccessful.

Facts: A broker was hired to sell a 1960 Aston Martin DB4 as the agent of its owner. The buyer contacted the broker and agreed to purchase the car for $345,000. The buyer sent two checks to the broker. The broker deposited both checks without endorsement. The broker sent part of the proceeds to the owner, but an officer of the broker stole the rest and absconded.

The buyer's bank began an investigation and determined that the checks were deposited without proper endorsement. The bank returned the check to the broker's bank stamped "Return Reason -- endorsement irregular." The broker's bank debited the broker's account and the amount was credited back to the buyer's bank account. The broker's bank returned a copy of the check to the broker; the original check was destroyed upon processing and replaced with a copy.

After that, the car's owner contacted the buyer and asked him to wire the purchase money directly to the owner. Before proceeding, the buyer wanted to ensure that the broker would not re-deposit the original check. The broker returned to the buyer the copy it had received from its bank.

The buyer then wired the purchase money directly to the owner. He also placed a stop payment on the original check. The owner released the car to the buyer and signed the title over to him.

More then a month later, the broker's bank asserted a late return claim against the buyer's bank and argued that it was entitled to be paid on the check. The claim was made through the Federal Reserve and resulted in an automatic adjustment of accounts, reversing the flow of funds so that the buyer was now without the money. It appeared that the broker's bank's actions were precipitated by the inability to recover the funds from the broker.

The buyer's bank assigned its rights to the buyer, who filed suit against the broker and the broker's bank to recover his money. The parties filed cross motions for summary judgment.

Analysis: The court began with the general rule that where there are contesting parties who are relatively blameless, it is necessary to examine the conduct to determine who had more control and which party was in a position to prevent the loss.

Regarding the missing endorsement: the court noted that case law indicates that a bank is not at fault for transferring an item with a missing endorsement if the same transaction of funds would have resulted, regardless of the missing endorsement. Applying this principle, the court concluded that the failure to recognize the lacking endorsement was irrelevant to the question of fault in the case.

Regarding the return of the check to the broker's bank, pursuant to section 4-104(a)(10) of the Commercial Law article, an item is finally paid when the payor bank makes provisional settlement and fails to revoke the settlement in the time and manner permitted by statute, clearing house rule, or agreement. The court found that the buyer's bank violated the rule when it sought to dishonor the check 15 days late under an improper endorsement theory.

The court also found that the buyer's bank violated Federal Reserve protocol by returning the check through the Federal Reserve rather than by dealing directly with the broker's bank.

The court further found, however, that the broker's bank returned the substitute check to the broker, along with a debit advice, and fined the broker a returned check fee. Based upon this, the court concluded that the broker's bank had the opportunity to review the returned check and decide the appropriate next steps. This was critical.

The court concluded that when the broker's bank made the election to collect from its customer, it no longer was entitled to use the copy of the check because it was then "owned" by the broker. Because the strategy elected by the broker's bank was unsuccessful, the court concluded, the bank was no longer entitled to a second bite of the apple against the buyer's bank, nor may it legally do so without title to the check copy. By making the election pursue and debit its customer, the broker's bank waived further claim against the buyer's bank.

On this basis, the court held that the broker's bank had more control and was in a better position to prevent the financial loss. As a result, the court granted summary judgment for the buyer.

The full opinion is available in pdf.

Hovnanian Land v. Annapolis Towne Centre (Ct. of Appeals)

Filed: July 20, 2011
Opinion by Judge Sally D. Adkins

Held: A condition precedent may be waived by a party’s conduct despite a non-waiver clause found in a purchase agreement that requires waiver to be in writing.

Facts: Respondent is the owner and developer of a 33-acre, mixed-use development project. Respondent intended to sell parcels while retaining ownership over a few common parcels that were to be maintained through a collection of an annual Common Area Maintenance (“CAM”) fee from the owners of each parcel.

Respondent entered into a Purchase Agreement with Petitioner for the sale of two parcels where the Petitioner was planning on constructing three residential towers. The Purchase Agreement required the Respondent to establish CAM fees for the Petitioner’s parcels, and provide common area maintenance funding for the other parcels as conditions precedent to the Petitioner completing the purchase, which the Petitioner could enforce or waive. The Purchase Agreement also contained a non-waiver clause that required any waiver to be in writing.

Commencing on May 11, 2006 and continuing until January 2007, Respondent drafted a declaration and a proposed Supplemental Agreement between the parties to handle the CAM fees and the Petitioner had questions on each draft concerning them. Declarations were even recorded on October 30, 2006, December 20, 2006 and January 22, 2007. Prior to the recording of the January 2007 Declaration, Petitioner expressed concerns that there were some changes to the documents agreed upon by the parties that did not appear. Respondent notified Petitioner that it would address its concerns in a Supplement Agreement.

Over the next year, the project proceeded towards closing, and as they approached the original closing date, Petitioner paid $100,000 to extend that date, and soon afterward, Petitioner realized the extent to which the recent housing collapse had reached the markets. Petitioner sought an additional extension and/or a discount from Respondent and the parties could not agree on an acceptable extension deal and throughout these negotiations, Petitioner referenced market difficulties as the major reason for the requests.

On February 1, 2008, Petitioner’s president sent a letter to Respondent asserting that Respondent failed to fulfill the conditions precedent. On March 3, 2008, Respondent responded in a letter asserting that it satisfied the conditions because the Amended Declaration provided for annual assessments through the use of Supplemental Agreements.

Respondent filed a complaint in the Circuit Court seeking a declaratory judgment that Petitioner breached the Purchase Agreement. Petitioner answered, claiming that its obligations were relieved by Respondent’s failure to comply with the terms of the Purchase Agreement.

After both parties moved for summary judgment, the Circuit Court granted Respondent’s motion for summary judgment. Petitioner appealed to the Court of Special Appeals, and in an unreported opinion, the court affirmed the Circuit Court’s decision.

Petitioner then sought certiorari from this Court.

Analysis:

The threshold issue considered by the Court is whether a party can waive a contract right through its actions even if the contract contains a “non-waiver” clause. Relying on Freeman v. Stanbern Const. Co., 205 Md. 71, 106 A.2d 50 (1954), the Court held that oral modifications of a written contract may be established by the preponderance of the evidence even if a contract provides that the contract cannot be varied except through a written agreement by the parties.

The Petitioner argued that there is a distinction between “mutual” waiver and the waiver of a condition precedent. The Court held that there was no distinction and that case law does require mutual knowledge and acceptance, whether implicit or explicit, of the non-conforming action, and that in this case, the alleged waiver was “mutual” in that Respondent drafted and proposed the assertedly non-compliant declaration while Petitioner scrutinized it and provided substantial feedback. The Court added that a condition precedent usually benefits one of the two parties, and the benefited party’s actions will weigh more heavily in those cases.

Based on that analysis, the Court reviewed the Circuit Court’s grant of Respondent’s motion for summary judgment. The Circuit Court, apparently at the suggestion of the parties, resolved the issue on summary judgment, concluding as a matter of law that Hovnanian had waived the condition precedent. Yet, whether subsequent conduct of the parties amounts to a modification or waiver of their contract is generally a question of fact to be decided by the trier of fact. Further, nonwaiver clauses, although not favored by courts, must be considered by the trier of fact. Given the highly factual nature of the waiver inquiry, it is an uncommon case in which the issue can be resolved by summary judgment.

The Court then analyzed the Circuit Court’s decision to grant the Respondent its summary judgment motion. The Circuit Court held that as a matter of law, the Petitioner waived the condition precedent. Relying on University Nat’l Bank v. Wolf, 279 Md. 512 (1977), the Court held that analyzing the subsequent conduct to determine whether a waiver of a contract term has occurred is generally a question of fact to be decided by the trier of fact. In this case, a party must show the intent to waive both the contract provision at issues and the non-waiver clause.

Conclusion

Applying the foregoing rules, the Court reversed the granting of summary judgment and remanded the case to the lower court for the trier of fact to determine whether any party waived any rights.

The full opinion is available in pdf.

Uduak J. Ubom v. SunTrust Bank (Ct. of Special Appeals)

Filed: April 4, 2011
Opinion by Judge Kathryn Grill Graeff

Held: The clear language of an Agreement for a Line of Credit, as a whole, shows that the signature of a managing partner as guarantor was in a personal capacity, resulting in personal liability when the LLC defaulted on its obligations.

Facts: A professional limited liability company that provides legal services obtained a line of credit from a bank. The Managing Partner, the managing attorney and sole owner of the LLC, signed his name twice on the Agreement, once on the signature line for “Applicant” and once on the signature line for “Guarantor.” After both signatures, The Managing Partner included his title of “Managing Partner.” The Managing Partner also completed the personal information listed under the section title “Guarantor Information.” The Bank approved the line of credit.

Almost three years later, the bank filed a Complaint against the LLC and The Managing Partner asserting that the LLC had failed to make scheduled monthly payments due on the account, and requesting that the court grant judgment in its favor against the LLC and The Managing Partner, jointly and severally. The Managing Partner acknowledged that the LLC had defaulted on the Agreement, but argued that he signed the Agreement in his official capacity as Managing Partner, not as a personal guarantor of the loan. The Managing Partner further asserted that the bank representative told him that although he was signing as guarantor on the LLC’s Line of Credit, he could avoid personal liability by not including his name on the page of the Agreement that asked for legal name of guarantor, and by writing his title of “Managing Partner” after his signature on the final page of the Agreement.

The Circuit court granted summary judgment in favor of the bank and against the LLC and The Managing Partner. The Managing Partner appealed.

Analysis: The legal question before the court was whether The Managing Partner signed his name in his capacity as an officer of the corporation or whether it was a personal guaranty. The Court noted that The Managing Partner in arguing that his signature did not create a personal guaranty cited no case law in support of this assertion. However, the Court exercised its discretion to consider The Managing Partner’s claim. The Managing Partner argued that the court should have allowed him to introduce evidence of the statements allegedly made to him by SunTrust’s representative.

Maryland courts adhere to a principle of objective interpretation of contracts, and only when the language of the contract is ambiguous will the court look to extraneous sources for the contract’s meaning. The Court compared the contract in this case to a similar case, L & H Enterprises, Inc. v. Allied Building Prod. Corp, 88 Md. App. 642, where there was a question of whether a guaranty of a corporation’s obligation, signed by a corporate officer, was signed in the officer’s representative or individual capacity. Although the Court in that instance found there was no personal liability because there was intent to only bind the corporation and only one place the corporation’s representatives signed, the Court distinguished that case from the case at hand. Here, there were two signature lines, one for “Applicant,” the law firm, and one for “Guarantor.” The Managing Partner signed his name on both signature lines, including his title after his signature. The court asserted that a corporate officer is not relieved of personal liability by the mere addition of his corporate title to a signature line.

The Managing Partner also completed the personal information under the “Guarantor Information” section of the form. If The Managing Partner had only signed the guaranty in a representative capacity, this would render the guaranty inconsequential; it would add nothing to SunTrust’s security to have the law firm, through its Managing Partner, guaranty an obligation to which the law firm was already bound. The language of the Agreement specifically indentifies the applicant, the LLC, as the entity primarily responsible for the line of credit, and the individual signing as guarantor, as jointly liable for the obligation of the LLC.

Since the language, which is clear and unambiguous, of the Agreement as a whole shows an intent to fix personal liability, parol evidence is inadmissible to contradict the clear terms of the Agreement.

The Court held that the circuit court properly granted bank’s motion for summary judgment against the LLC and the Managing Partner.

The full opinion is available in pdf.

Bradshaw v. Hillco Receivables, LLC (Maryland U.S.D.C.)

Filed: February 23, 2011

Opinion by: Judge Richard D. Bennett

Held: A debt collector violates the Fair Debt Collection Practices Act (“FDCPA”) by violating State law for failing to register as a debt collector. In addition, the unlicensed filing of lawsuits to collect debts purchased from original creditors is violative of the FDCPA. Both questions are issues of first impression in this district and in the Fourth Circuit.

Facts: On June 17, 2009, the creditor (Defendant in the underlying case) filed suit against the debtor in the District Court of Maryland for Frederick County in order to collect a debt that it purchased from the debtor's original creditors after the debt went into default. The debtor then brought a separate class action against the creditor, asserting claims that the creditor acted as a debt collector in the State of Maryland without a license and that the creditor unlawfully filed lawsuits against the debtor and others as part of its debt collection practices. The debtor contends that the creditor, through its actions, violated the FDCPA, 15 U.S.C. § 1692 et seq., the Maryland Consumer Debt Collection Act (“MCDCA”), Md. Code Ann., Com. Law § 14-201 et seq., and the Maryland Consumer Protection Act (“MCPA”), Md. Code Ann., Com. Law § 13-101 et seq.

Analysis: The creditor acquired the debtor's delinquent account while it was in default, and the creditor is a person who engages directly or indirectly in the business of collecting such consumer claims. According to the Court, the creditor is therefore a "collection agency" within the meaning of the Maryland Collection Agency Licensing Act, Md. Code Ann., Bus. Reg. § 7-101, et seq. ("MCALA"). In the Court's view, the statutory scheme and its legislative history confirm that the statute is intended to cover not only agents of the original owners of consumer debts but also purchasers of such debt such as the creditor here. Debt purchasers who collect consumer claims through civil litigation are therefore subject to the licensing requirement. The Court found that the creditor violated this requirement when it failed to obtain a collection agency license prior to suing the debtor to collect a debt purchased from the debtor's original creditor. According to the Court, although the creditor's violation of MCALA's licensing requirement does not itself give rise to a private right of action, it may support a cause of action under the FDCPA. The Court specifically declined to hold that any violation of state law, no matter how trivial, constitutes a per se violation of the FDCPA. The FDCPA prohibits the use of any “false, deceptive, or misleading representation or means in connection with the collection of any debt,” 15 U.S.C. §1692e, and provides a non-exhaustive list of conduct that violates the FDCPA, including “[t]he threat to take any action that cannot legally be taken.” 15 U.S.C. § 1692e(5).

The creditor argued that it was not liable for violating the FDCPA because it did not threaten to take illegal action against the debtor but, rather, merely filed an illegal lawsuit against him. Although noting a split of authority among the circuits, the Court adopted the majority view, holding that the relevant section of the FDCPA prohibits the taking of “action that cannot legally be taken,” as well as the threatening of such action. Furthermore, under the "least sophisticated debtor" standard prevailing in the Fourth Circuit, the Court held that the filing of an illegal collection lawsuit would reasonably be construed by such a debtor as a threat to take illegal action.

The Court also held that the creditor was also not protected by the "bona fide error" defense, namely, that “the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.” 15 U.S.C. § 1692k(c). The Court held that this defense was not available to the creditor because of the Supreme Court's recent holding in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 130 S. Ct. 1605, 1608 (2010) that it does not apply to a violation resulting from a debt collector’s mistaken interpretation of the legal requirements of the FDCPA.

For essentially the same reasons as it found the creditor liable for violating the FDCPA, the Court also determined, on summary judgment, that the creditor had violated the MCDCA and the MCPA. Similar in purpose and scope to the FDCPA, the MCDCA states that a “person collecting or attempting to collect an alleged debt arising out of a consumer transaction” may not “[c]laim, attempt, or threaten to enforce a right with knowledge that the right does not exist.” Md. Code Ann., Com. Law §§ 14-201(b) & 14-202(8). The MCPA prohibits “unfair or deceptive trade practices,” Md. Code Ann., Com. Law § 13-301, and expressly designates as “unfair or deceptive trade practices” those that constitute any violation of the MCDCA. Each statute provides for a private right of action for its violation. The Court determined that because the creditor was not immunized from its conduct based on a mistake of law (i.e., that it was not required to be licensed under the MCALA), and because the creditor actually violated that law and was reckless as to whether its conduct was proscribed, the knowledge element of the MCDCA was satisfied. For the foregoing reasons, the Court ruled that the debtor was entitled to partial summary judgment, on liability only, on its claims for damages under the FDCPA, the MCDCA, and the MCPA (Counts II, III, and IV).

As a result of Judge Blake's recent opinion in Hauk v. LVNV Funding, LLC, __ F. Supp. 2d __, 2010 WL 4395395 (D. Md. Nov. 5, 2010), the Court held that declaratory and injunctive relief was not available to the debtor in the case at bar. The Court therefore found that the creditor was entitled to summary judgment on the debtor's Count I, which sought such relief.

Practice Tip: Judge Bennett specifically noted that the "FDCPA is a strict liability statute and a consumer has only to prove one violation in order to trigger liability." Consumer debt purchasers would therefore be wise to comply fully with this statute and its Maryland counterpart in order to avoid liability to consumers, including those, like the debtor in this case, who do not dispute the validity or amount of the underlying debt.

Related Opinion: In an earlier opinion granting the debtor's motion to strike the creditor's affirmative defenses, Judge Bennett held that the plausibility standard set forth in Bell Atlantic Corporation v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007) and Ashcroft v. Iqbal, 566 U.S.__, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009) applies to the pleading of affirmative defenses.

The full opinion is available in pdf..

The George Wasserman and Janice Wasserman Goldsten Family Limited Liability Company v. Kay (Ct. of Special Appeals)

Filed: February 9, 2011

Opinion by Judge James R. Eyler

Held: A claim brought by partners in a general partnership or members of an LLC against a managing partner or managing member will survive a motion to dismiss if they sufficiently allege they suffered harm directly and the managing partner or managing member violated duties owed to the partners or members.

Facts: Plaintiffs are partners in five real estate investment general partnerships and two real estate investment LLCs. Defendants are Mr. Kay, an individual that is the managing member or de facto managing member or partner of the partnerships and LLCs, and Kay Management Company, Inc. and Kay Investment Group, LLC, two entities controlled by Kay. Plaintiffs alleged Defendant took money from the partnerships and LLCs and invested the money with Kay Investment through Kay Management. In turn, Kay Investment invested the money with the Bernard Madoff entities. Plaintiffs brought suit following the Madoff ponzi scheme collapse.

The complaint set forth thirteen counts, including, among others, fraud, breach of fiduciary duties, conversion, civil conspiracy and negligence. The Circuit Court granted Defendant's motion to dismiss because none of the claims were individual, the derivative claims involving the partnerships were not agreed to by a majority of the partnership, and the failure to make demand on behalf of the LLCs was unexcused.

Analysis:

After a lengthy discussion of corporations, general partnerships and LLCs, the Court framed the principal issues on appeal as (1) whether Plaintiffs may assert individual claims against Kay and (2) whether Plaintiffs may bring derivative claims on behalf of the partnerships and LLCs against Kay.

(1) Individual Claims

Applying logic from Shenker v. Laureate Education, Inc., which permitted a shareholder to bring a direct action when the shareholder suffers the harm directly or duties owed to the shareholder have been violated, the Court extended the rationale to the law of partnerships and LLCs. The Court then concluded Plaintiffs sufficiently alleged (a) they suffered harm directly and (b) Kay violated duties owed directly to the Plaintiffs.

Plaintiffs alleged Kay took funds that were required to have been distributed. He also took funds required to be held in reserve, further injuring Plaintiffs by forcing them to replace the removed reserves.

Under the Revised Uniform Partnership Act, general partners owe each other, not just the partnership, fiduciary duties. Section 9A-405(b) of the RUPA "clearly provides a mechanism through which partners can sue other partners directly for breach of those obligations and others." However, there is no statute in Maryland expressly addressing LLC members' fiduciary duties. The Court, after finding managing members to be "agents for the LLC and each of the members, which is a fiduciary position under common law," again applied rationale from Shenker, to state where no statute precludes or limits fiduciary duties under common law, the underlying duties apply. Accordingly, the Court found Kay's fiduciary duties as the managing partner/member to run to the partnerships, the LLCs, the partners and the members.

(2) Derivative Claims

The Court found the term "derivative" inappropriate in a general partnership context. Derivative actions are necessary in a corporate and limited partnership context because shareholders and limited partners have no management rights. "Unlike shareholders and limited partners, however, general partners all have the ability to act on behalf of the partnership, and all have management rights." Accordingly, no need for a derivative action exists. The Court turned to whether minority general partners can bring claims against other partners. The Court cited many sections of RUPA to conclude all partners have equal ability to enforce rights involving partnership property. While section 9A-405(j) of RUPA requires unanimous consent of all the partners, the Court felt it should be tempered "when non-plaintiff partners have conflicts of interest." Instead, "the unanimity requirement should not apply to defendant partners and other interested partners."

However, based on the facts, the Court found a suit on behalf of the partnerships unnecessary because Plaintiffs adequately alleged an individual direct injury. If Plaintiff's prove the allegations, complete relief will be afforded. The derivative claims on behalf of the LLC were rejected for the same reason.

Note: In discussing fiduciary duties in the LLC context, the Court, citing section 4A-402(a) of the Maryland Limited Liability Company Act, notes that "one Maryland statute governing LLC operating agreements does suggest that provisions within operating agreements could alter existing duties or create other duties..." However, no such provisions were alleged in the case.

The full opinion is available in pdf.

Sherwood Brands, Inc. v. Great American Insurance Company (Ct. of Appeals)

Filed: February 24, 2011
Opinion by Judge Glenn T. Harrell, Jr.

Held: Pursuant to Maryland Code (1997, 2006 Repl. Vol.) Insurance Article Section 19-110, which provides that "an insurer may disclaim coverage on a liability insurance policy on the ground that the insured...has breached the policy...by not giving the insurer required notice only if the insurer establishes...that the lack of...notice has resulted in actual prejudice to the insurer," an insurer is required to demonstrate how it was prejudiced by late-bestowed notice so long as the claim against the insured arose before the expiration of the policy.

Facts: Sherwood (the "Insured") was issued a series of insurance policies by Great American Insurance Company (the "Insurer"). The most relevant policy (the "Policy") provided that Insurer would pay on behalf of Insured all "Claims" made against Insured during the Policy Period. Claims included civil proceedings made against Insured. The policy also provided that as a condition precedent to Insured's rights under the policy, Insured was required to provide written notice to Insurer of any Claim made against Insured during the policy period, including civil proceedings, as soon as practicable, but in no event later than ninety (90) days after the end of the Policy Period.

Two separate civil claims were filed and served on Insured within the Policy Period. However, in both cases, Insured failed to notify Insurer of the claims before ninety days after the expiration of the Policy Period. Insurer denied coverage of both claims stating that while both claims were covered by the policy, and that suits were filed against Insured within the Policy Period, Insurer did not receive notice of the suits until after the ninety-day notice requirement, and therefore was not obligated under the policy.

Insured filed a complaint and a motion for summary judgment in the Circuit Court alleging that Insurer breached the Policy by denying the claims. Insured also averred, regarding the claims, that Insurer was not prejudiced by any alleged delay in notification. Insurer denied any breach of the policies and asserted that coverage for the claims was barred due to Insured's failure to provide notice within 90 days after the end of the policy period. The Circuit Court agreed with Insurer's reasoning and granted its motion for summary judgment. Insured timely appealed to the Court of Special Appeals, and the Court of Appeals issued a writ of certiorari to consider "whether the lower court erred by ruling that Great American was not required by Section 19-110 of the Maryland Insurance Code to show actual prejudice in order to deny coverage based on the Sherwood's failure to comply with the notice condition of the [Policy] at issue."

Analysis: The Court engaged in a thorough historical review of relevant Maryland notice-prejudice legislation and case law to determine the status of the law today. The statute now governing notice-prejudice clauses in insurance policies is Maryland Code (1997, 2006 Repl. Vol.) Insurance Article Section 19-110. This statute provides:

An insurer may disclaim coverage on a liability insurance policy on the ground that the insured or a person claiming the benefits of the policy through the insured has breached the policy by failing to cooperate with the insurer or by not giving the insurer required notice only if the insurer establishes by a preponderance of the evidence that the lack of cooperation or notice has resulted in actual prejudice to the insurer.

Applying the text of Section 19-110, and the analyses and holdings from the cases reviewed by the Court, the court reached the following holdings:

First, the Court held that Section 19-110 does apply to claims-made policies in which the act triggering coverage occurs during the policy period, but the insured does not comply strictly with the policy's notice provisions. In this situation, Section 19-110 mandates that notice provisions be treated as covenants (rather than conditions precedent), such that failure to abide by them constitutes a breach of the policy sufficient for the statute to require the disclaiming insurer to prove prejudice.

Second, the Court held that Section 19-110 does not apply to claims-made policies in which the act triggering coverage does not occur until after the expiration of the liability policy, as this non-occurrence of the conditions precedent to coverage is not a "breach of the policy," as required by the statute.

The Court noted that its opinion may place Maryland jurisprudence at odds with the majority of other jurisdictions, but concluded that the text of, and the policies underlying Section 19-110, require the conclusions reached by the Court.

The full opinion is available in PDF.

In re Terra Industries, Inc. (Balt. City Cir. Ct.)

Filed: July 14, 2010
Opinion by Judge Evelyn Omega Cannon

Held: An exculpatory clause in a corporation's charter holding directors harmless from personal liability to the corporation or shareholders to the fullest extent of the law is enforceable, and it justified entry of summary judgment in favor of defendant directors. Section 1-102 of the Corporations and Associations Article is expansive and applies to every Maryland corporation and to all their corporate acts.

Facts: CF, a competitor of Terra, made numerous attempts to acquire Terra through unsolicited bids. Terra rejected those offers. CF bought Terra stock on the open market, which allowed it three seats on Terra's Board of Directors. Terra later told CF that it was not for sale and CF withdrew its offer to acquire Terra and announced it was no longer pursuing the acquisition. Unbeknownst to CF, Terra was entertaining other potential interests in its acquisition. CF later made another offer to acquire Terra which was accepted by the Board and the two companies merged.

Before the Terra/CF merger, four actions were filed, two of which were Maryland cases and consolidated into this action, alleging, among other things, that the individual defendants breached fiduciary duties by approving the Terra/CF merger. Terra's charter contained a provision which provides: "To the fullest extent permitted by statutory or decisional law . . . no director or officer of the Corporation shall be personally liable to the Corporation or its stockholders for money damages."

Analysis: The court found that the exculpatory clause was applicable, Plaintiffs had not pled facts of active and deliberate dishonesty, and the exculpatory clause may form the basis for granting a motion for summary judgment. Both section 2-405.2 of the Corporations and Associations Article and section 5-418 of the Courts and Judicial Proceedings Article of the Maryland Code allow the charter of a corporation to include any provision expanding or limiting the liability of its directors and officers. The court also found that actions taken in the sale or merger of a corporation are "corporate acts" as contemplated by section 1-102 of the Corporations and Associations Article and discussed in Shenker v. Laureate Education, Inc., 411 Md. 317 (2009).

The full opinion is available in pdf.

Pro-Football, Inc. v. Tupa (Ct. of Special Appeals)

Filed: February 28, 2011
Opinion by Judge Robert A. Zarnoch.

Held: Maryland courts will not enforce a forum selection clause that avoids application of Maryland’s workers’ compensation law.

Facts: Thomas Tupa, a former punter for the Washington Redskins, injured his lower back while warming up for a preseason game. Tupa filed a claim with the Maryland Workers’ Compensation Commission. After a hearing, the commissioner found that Maryland had jurisdiction over Tupa’s claim despite a forum selection clause to the contrary. The Maryland Circuit Court found, on appeal, that Maryland had jurisdiction as a matter of law. The issue was appealed to the Court of Special Appeals.

Analysis: The Court of Special Appeals affirmed the Circuit Court’s decision. Maryland’s Worker’s Compensation Act (the “Act”) provides that rights of employees under the Act cannot be waived. The court found that Maryland has a strong public policy in compensating employees for their injuries. Because the effect of the forum selection clause would be to avoid application of the Act, the court held that the forum selection clause contravened public policy.

The full opinion is available in pdf.

Zorzit v. 915 W. 36th Street (Ct. of Special Appeals)

Filed: February 2, 2011
Opinion by Judge Patrick L. Woodward

Held: The Court held that interest on the unpaid balance of the purchase price at a foreclosure sale from the date of such sale to the date of settlement is abated with respect to delays in the settlement attributed to other parties and is not abated to delays arising from the judicial process or the purchaser when the "Terms of Sale" found in an advertisement for the foreclosure sale included the payment of interest by the purchaser.

Facts: Three properties located in Baltimore City were advertised for sale at public auction by Appellant, the substitute trustee appointed by the court to preside over the foreclosure sale. The "Terms of Sale" portion of the advertisement stated: "Interest to be paid on the unpaid purchase money at the rate of 10% per year from the date of sale to the date funds are received in the office of the Substitute Trustee. In the event settlement is delayed for any reason, there shall be no abatement of interest."

Appellees purchased the properties at the foreclosure sale on June 30, 2008. The circuit court issued a notice of sale on July 16, 2008, and set August 15, 2008 as the date the court would ratify the sale of the properties. However, on August 15, 2008 the former owners of the properties filed exceptions to the foreclosure sale. The circuit court denied the former owners' exceptions on October 31, 2008, and settlement of the properties occurred on December 8, 2008. Appellees paid $47,584.71 in interest at settlement.

On January 5, 2009, appellees filed a motion for abatement of interest in the circuit court. The circuit court ruled in favor of the appellees and abated the entire interest. The Court of Special Appeals affirmed in part where delays were due to the former owners filing the exceptions to the foreclosure sale and reversed in part for all other time periods.

Analysis: The Court recited the rules governing foreclosure actions and relevant case law concerning the abatement of interest when settlement on a foreclosure sale is delayed. Before making the sale of a property subject to a lien, MD Rules require a trustee to “publish notice of the time, place, and terms of sale in a newspaper of general circulation in the county in which the action is pending once a week for three successive weeks." As soon as possible but no more than 30 days after the sale, the MD Rules require the person authorized to make the sale to file with the court a complete report of the sale and an affidavit of the fairness of the sale and the truth of the report. According to the MD Rules, once the report is received by the court, the clerk must issue a notice stating that the sale will be ratified unless cause to the contrary is shown within 30 days after the date of the notice. If, within the thirty day period, the court receives exceptions to the sale, then the court must determine the applicable judicial process, and upon a final order of ratification of sale, the settlement takes place with the foreclosure purchaser.

The Court then reviewed a number of Maryland decisions where the calculation of interest was at issue. The Court relied on Donald v. Chaney where the Court of Appeals ruled on whether purchasers at a foreclosure sale were required to pay interest on the unpaid balance of the purchase price from the date fixed for settlement to the actual date of settlement when the delay was attributed to the purchasers inability to obtain financing. In Donald, the Court of Appeals adopted the following principle: “A purchaser at a judicial sale will be excused from the requirement to pay interest upon the unpaid balance for the period between the time fixed for settlement and the date for the actual settlement only when the delay (1) stems from the neglect on the part of the trustee, (2) was caused by necessary appellate review of lower court determinations, or (3) was caused by the conduct of the other person beyond the power of the purchaser to control or ameliorate.”

In applying the foregoing principles to a purchaser where the purchase was not conditioned on financing, the Court of Appeals held that the purchasers should have been responsible for the interest accruing for the period after the fixed settlement date. In Donald, the Court of Appeals effectively granted the trial courts discretion to avoid the common law rule requiring a foreclosure sale purchaser to pay interest from the date fixed for settlement to the actual date of settlement if any of the forgoing criteria are met.

The Court also relied on its previous opinion in White v. Simard in deciding whether the terms and conditions found in any notice of sale become part of the sales agreement. The Court denied a defaulting purchaser’s claim to the excess in proceeds from the sale because the terms and conditions in the notice of sale stated that “the purchaser shall not be entitled to any surplus proceeds or profits resulting from any resale of property” became part of the contract of sale terms. The Court’s holding that the advertisement terms and conditions applied to the contract of sale overcame the common law rule that the defaulting purchaser is entitled to any surplus proceeds of a resale.

The Court also relied on the Baltrotsky decision by the Court of Appeals whereby the Court of Appeals was called upon to decide whether the trial court had the discretion under the equitable considerations articulated in Donald to set aside a binding term of sale specified in the advertisement for the foreclosure sale where it stated in the ad that the purchaser must pay interest on unpaid purchase amounts. After the sale, the defaulting owner then filed a number of claims in court that were delaying the final settlement for several months. The defaulting seller argued that the terms of the ad required the purchaser to pay the interest during the delays and the purchaser argued that the Donald factors were met and that interest was abated during such period. The Court Appeals applied public policy to rule in favor of the purchaser and against the defaulting seller.

The Court also relied on its opinion in Thomas where the Court considered again whether the terms of an advertisement requiring the payment of interest that become part of the sales agreement can be overcome by public policy and the courts discretion. The advertisement stated that the purchaser is required to pay interest regardless of the reason if the settlement is delayed. The owner of the property filed a number of exceptions that delayed the process. The Court ruled that the opinions in the previous cases hold for the principle that the contract provisions are “presumptively binding” and the presumption can be overcome by the factors of Donald and public policy.

Before applying the previous decisions to the facts in the current case, the Court established three time periods (1) the date of the foreclosure sale to the initial date for final ratification, (2) the initial date for final ratification to the actual date of final ratification, (3) the actual date of final ratification to the date of settlement.

The court then held that because the terms of sale included in the advertisement for the foreclosure sale became a part of the contract when the sale was ratified by the circuit court, the prohibition of the abatement of interest was presumptively binding upon the parties, unless appellee could show using the Donald principles that an equitable circumstance justifies abatement. The Court held that the delay in period one was necessary under the MD Rules so the abatement of interest did not apply. The Court held that the delay in period 2 was caused by the conduct of other parties beyond the control and power of the purchaser to control or ameliorate since the owner filed exceptions, and thus, interest was abated during this period. The Court held that the purchaser did not provide any explanation for the delay in period 3 (the terms of sale said 10 days after ratification and the settlement was actually 38 days) so the presumption could not be rebutted for this period.

Accordingly, the court held that the circuit court abused its discretion in abating the interest for the entire period, and remanded the case to calculate the proper interest amount to be paid.

The full opinion is available in PDF.