Wednesday, June 27, 2012

Boland Trane Associates v. Boland (Mont. Co. Cir. Ct.)

Filed: June 6, 2012
Opinion by Judge Ronald B. Rubin

Held: Applying the standard newly announced by the Court of Appeals, by which trial courts are to assess the decisions of special litigation committees in response to shareholder demands, the circuit court held that the committee in this case used proper methods, focused on the correct issues, and reached a reasonable, good faith business decision. Accordingly, the court accepted its recommendation to terminate the pending derivative litigation.

Facts:In Boland v. Boland, 423 Md. 296 (2011), the Court of Appeals announced new standards to be used when trial courts review the decisions of a special litigation committee ("SLC") in a derivative suit. We analyzed that opinion, with a full account of the facts, in a previous post. The case was returned to the circuit court for disposition consistent with the standard.

Pursuant to the standard, the circuit court considered the evidence concerning how the SLC members were chosen, the relationships, if any, among the SLC and the company board(s), and the methods and procedures of the SLC investigation, the issues reviewed, and the basis for it conclusions.The circuit court was to determine whether there was a reasonable basis for the SLC's conclusions. The burden of proof was on the SLC to show its independence and the reasonableness of its investigation and conclusion(s).

BTA and BTS were related, closely held Maryland S corporations.They were owned by husband and wife, who issued stock over time to eight children and some long-term employees. Each recipient executed a stock purchase agreement ("SPA") that restricted transfer. After the death of the founder/husband, his wife sold her stock back to the companies for an annuity. This was followed by a series of stock sales to some but not all of the children. When the non-participating children found out, they were upset.

After one child/shareholder died, the executor of her estate refused to sell the stock back to the companies. The companies sued for a declaration seeking to enforce the SPA. Each stockholder was named as an interested party. The children/shareholders who had been left out of the latest stock sales then filed a counterclaim advancing claims against the board members of each corporation.The counterclaimants also filed a derivative action based on exactly the same facts.

The companies moved to dismiss, advising the court that the boards of both companies had voted to form an SLC of two newly appointed directors who did not participate in the offending stock transactions.The SLC also hired independent, outside counsel. The circuit court stayed the litigation pending the outcome of the SLC inquiry.

After an investigation, the SLC issued its report and recommended that the derivative action be terminated.

Analysis: As an initial matter, the circuit court noted that the factual allegations of the direct claims against the directors track those of the derivative complaint. The court assessed the viability of the claims as direct and/or derivative. Relying on the standard set forth in Paskowitz v. Wohlstadter, 151 Md. App. 1 (1993), the circuit court posed the relevant inquiry as two-fold: 1) who suffered the alleged harm, the corporation or the individuals; and 2) who would receive the benefit of any recovery?

The court summarized the thrust of the claims as: 1) the defendants improperly redeemed the mother's stock for insufficient consideration; and 2) the claimants were excluded from the "sweet deal" of the subsequent stock sales. The court concluded that the harm alleged was to the companies, not the individual stockholders suing. Thus, the claims should be considered derivative.

Next, the court assessed the independence of the SLC and its counsel.The court noted that the board undertook a lengthy search for suitable candidates. One of the new directors was an experienced CPA. The other an experienced lawyer. The SLC selected another experienced lawyer as outside, independent counsel. The SLC members and its counsel had no prior experience or contacts with the parties. On this basis, the circuit court concluded the search for and retention of the SLC directors was proper and that the SLC was independent.

Next, the court assessed the reasonableness of the SLC's investigation and conclusions. The court held that there is no formula or set procedure that an SLC must follow. In sum, the SLC must act reasonably to investigate the theories of recovery and obtain and review information relevant to the subject matter. Here, the SLC investigated for five months. It solicited briefs from all parties outlining their legal positions. The companies did so. The claimants did not.The SLC also obtained and reviewed relevant documents, interviewed 11 witnesses (including the key actors), and spent at least 160 hours in the process. The SLC met with counsel eight times before issuing a report. The SLC also relied on generally accepted stock valuation methodologies, sources of information, and four independent appraisals.

On that basis, the court held that the SLC understood its role, employed proper methods of investigation, and focused on the right legal and factual issues. The court concluded that the SLC reached a reasonable, good faith business decision, in a reasonable and fair manner, and it accepted its recommendation to terminate the derivative litigation.

The full opinion is available in pdf.

Friday, June 8, 2012

MRA Property Management, Inc. v. Armstrong (Ct. of Appeals)

Filed: April 30, 2012
Opinion by Judge Lynne Battaglia
Held:  The Maryland Consumer Protection Act (“MCPA”) could apply to disclosures made in a resale certificate by a condominium association and its management company during the sale of a condominium if the information provided is essential to the transaction, even though neither entity is a direct seller.  A disclosure could also violate the MCPA if it is false or misleading, or had the capacity, tendency, or capability of misleading even if it complies with the Maryland Condominium Act.

Facts:  This case arises from a special assessment imposed on all unit owners of the Tomes Landing Condominiums to pay for water damage to the buildings allegedly caused by improper construction of the buildings and incorrect installation of flashing that allowed water to seep behind the building facades and possibly compromise the structural integrity of the condominiums.  The unit purchasers alleged that the extent of the water damage had been known by the condominium association (the "Association") and its management company ("MRA") since 1996 and they failed to disclose such information in the resale package.  The unit purchasers were granted partial summary judgment in the amount of $1,000,000 against the Association and MRA in circuit court.  The basis for the award was that the operating budget the Association and MRA provided as part of a resale package to unit purchasers violated the MCPA because the budgets “had the capacity, tendency and effect of misleading the movants in connection with their purchases of the condominiums in Tomes Landing….”
The Court of Appeals granted petitions for writ of certiorari and vacated the circuit court’s grant of summary judgment saying that the MCPA does apply, but the Association and MRA were required to disclose only approved, not proposed or contemplated, capital expenditures in the operating budgets they provided to prospective purchasers.  The Court of Appeals remanded the case to consider whether the Association and MRA violated § 11-135(a)(4)(x) of the Maryland Condominium Act pertaining to disclosing whether the Association had “knowledge of any violation of the health or building codes with respect to the unit, the limited common elements assigned to the unit, or any other portion of the condominium.”
Both parties filed Motions for Reconsideration of the Court of Appeals decision.
Analysis:  The Court of Appeals granted the motions and decided there could be no violation of §11-135(a)(4)(x) because it is “knowledge of a charged violation…rather than the conduct underlying the violation, that requires disclosure” under that section.  As a result the Court found that “[b]ecause they were never issued a notice of any such violations, MRA and the Association could not have violated §11-135(a)(4)(x).”
The Court held that the MCPA may extend to one who is not the direct seller because “[i]t is quite possible that a deceptive trade practice committed by someone who is not the seller would so infect the sale or offer for sale to a consumer that the law would deem the practice to have been committed ‘in’ the sale or offer for sale.”  Hoffman v. Stamper, 385 Md. 1, 32 (2005).  Under the principles espoused in Hoffman, the Court found that the operating budgets provided by the Association and MRA “could have sufficiently implicated them in the entire transaction so as to impose liability under the [MCPA], given that every plaintiff averred in his or her affidavit that he or she would not have purchased a unit if the budget…had disclosed the expenses necessary to correct the problems with the condominium buildings.” 
In addition, the Court found that the statutory requirement to make certain disclosures to potential unit owners “injects MRA and the Association into the sale transaction as central participants because, were they to have failed to provide these materials, the contract for sale would not have been enforceable.”
The Court overruled the trial judge’s entry of summary judgment as a matter of law and remanded the case to the Circuit Court for Cecil County to decide whether the mandatory disclosures made by the Association and MRA were false or misleading, or had the capacity, tendency, or capability of misleading in violation of the MCPA.

The full opinion is available in PDF.