Thursday, December 26, 2013

BJ's Wholesale Club, Inc. v. Rosen (Ct. of Appeals)

Filed: November 27, 2013

Opinion by Lynne A. Battaglia

Held:  The Maryland Court of Special Appeals erred by invoking the State’s parens patriae authority to invalidate the exculpatory clause found in a liability waiver signed by the father of a five-year-old child who was injured at a kid’s club. 

Facts: Plaintiffs, mother and father, sued BJ’s Wholesale Club on behalf of their son, who was injured at the Club’s Owings Mills location.  The Incredible Kids’ Club, is a free supervised play area in BJ’s Wholesale club, where children can play while their parents shop at the warehouse.  Plaintiff’s son was in the club when he fell from a small apparatus onto the floor, resulting in a serious brain injury.  Prior to the day of the accident, along with other membership documents, the father had executed an agreement, which contained an exculpatory provision and indemnification language pertaining to the use of Kids’ Club. 

The complaint pled a cause of action in negligence.  BJ’s filed an Answer with a general denial in addition to a counterclaim alleging a breach of contract for failing to indemnify, defend, and hold BJ’s harmless pursuant to the indemnification clause.  In their Motion for Summary Judgment under Rule 2-501, BJ’s asserted that no factual matters were in dispute and that, pursuant to the Court’s decision in Wolf v. Ford, 335 Md. 525 (1994), the exculpatory clause was valid and the claim was barred as a matter of law.  Plaintiffs filed an opposition contending that the exculpatory and indemnification clauses were unenforceable, because they violated Maryland’s public policy interest of protecting children. 

The trial court noted that in general, Maryland courts have upheld exculpatory clauses that were executed by adults on their own behalf.  The trial court recognized that the issue of whether or not an exculpatory clause signed by a parent on behalf of their minor child was in fact one of first impression in Maryland.   In Wolf, the Court of Appeals had recognized three circumstances in which enforcement of an exculpatory clause could be precluded.  The trial court addressed the relevant exception, that public policy will not permit exculpatory agreements in transactions affecting the public interest.  Under Wolf, “transactions affecting public interest” fall into three categories.  Of those three, the only one relied upon by the trial court was a catchall category of the public interest exception to the validity of exculpatory clauses.  The trial court recognized this category was not easily defined, opining that while the Maryland Court of Appeals has intended to create a public interest exception, without further guidance, the trial court was not capable of evaluating the “totality of the circumstances” against a “backdrop of current societal expectations,” as it quoted from the Wolf decision.  The trial court closed by indicating that it did not have the ability to pronounce public policy grounds to invalidate the clause that the plaintiff had signed on behalf of his minor child, and granted BJ’s motion for summary judgment on the grounds that the exculpatory clause was valid. 

Analysis:  In their appellate decision, the Court of Special Appeals began by framing the issue as follows:  The central issue in this case is whether a parent may waive any and all future tort claims his or her child may have against a ‘commercial enterprise.’”  Rosen v. BJ's Wholesale Club, Inc., 206 Md. App. 708, 718 (2012)
To begin its analysis the Court of Special Appeals emphasized that Maryland case law provided very little guidance on the issue.  The Court turned to the appellate courts of other states, where they found that a substantial majority of states (majority view) that had “squarely considered whether a release agreement may bar future negligence claims of a child, have held that such agreements are invalid and unenforceable on public policy grounds.”   Their observation was that the minority view – states which held the exculpatory clause signed by the parent to be valid – only applied where a “commercial enterprise” was not the subject of the release, but instead where the release was of a claim against either a government agency or non-profit organization, or its agents.  The Court pointed to their observation that in nearly all of the other states where the majority view was adopted, the facts were nearly identical to those of the case at bar, in that a parent had executed, on his or her minor child's behalf, a release agreement (with or without an indemnification clause) in favor of a private commercial enterprise, usually as a pre-condition for allowing the child's access to and participation in some recreational activity.   While participating in that activity, the child sustained injuries, and suit was thereafter brought on the child's behalf.   In each case, the defendant entity attempted to shield itself from liability by invoking the release agreement, and the trial court granted summary judgment or a motion to dismiss.   Thus, all of the cases presented the same legal issue and were in essentially the same procedural posture. 

 With these considerations in mind, the Court first reflected on the Court of Appeals decision in Wolf.  Wolf v. Ford, 335 Md. 525 (1994).  However, where the trial court had stopped by expressing that it was not capable of evaluating the “totality of the circumstances” against a “backdrop of current societal expectations,” the Court of Special Appeals pointed to that third of the three exceptions discussed above – transactions effecting the public interest – and declared that such a backdrop may be found 1.) in the Plaintiffs claim 2.) in the Maryland Code and 3.) in Maryland common law, which, the Plaintiffs point out, reflected a substantial public interest in protecting children and their rights to seek redress for negligence, when that negligence results in injury to them.  The Court, in addition to relying on this wording in Wolf, rested their opinion on two other considerations.  First, they rooted their opinion on a perceived distinction between commercial and non-commercial enterprises.  Second, they based their decision on the exercise of the State’s parens patriae interest in caring for those, such as minors, who cannot care for themselves.  The Court of Special Appeals ruled the exculpatory agreement invalid and unenforceable. 

The Court of Appeals reversed.  In the Court’s review of the statutes and case law, they observed a reflection of a societal expectation that a parent’s decision-making is not limited.    The Court did not however believe that the plaintiff’s execution of an exculpatory agreement on behalf of their son was a transaction affecting the public interest within the meaning of Wolf, which otherwise would have impugned the effect of the agreement.   The Court took further issue with COSA’s opinion as to the perceived distinction between commercial and non-commercial enterprises.  The Court disagreed, and posited that the distinction between commercial and non-commercial entities is without support in Maryland jurisprudence.  The Court added that whether an agreement which prospectively waived a claim for negligence executed by a parent on behalf of a child should be invalidated because a commercial entity may better be able to bear the risk of loss than a non-commercial entity by purchasing insurance, is a matter for the legislature to consider.  Finally, the Court addressed COSA’s reference to the State’s parens patraie authority.  The Court clarified that the authority only reflects the State’s intervention when a parent is unfit or incapable of performing the parenting function, which was not alleged in the present case.

The Court concluded that they had never applied parens patriae to invalidate, undermine, or restrict a decision made by a parent on behalf of her child in the course of the parenting role.  The Court held the exculpatory agreement signed by the plaintiff on behalf of his son to be valid and enforceable. 

The full opinion is available in PDF here.

Saturday, December 7, 2013

United States of America ex rel. Cornelius Harris et al. v. Dialysis Corporation of America (Maryland U.S.D.C.)

Filed:  October 2, 2013
Opinion by Judge James K. Bredar

Held:  Relators brought four claims alleging Defendant violated the False Claims Act (“FCA”).  The Court held that Relators stated one viable claim for relief for Defendant’s alteration of Body Mass Index (“BMI”) numbers  in relation to Defendant’s billing the U.S. government for medical claims because BMI information was material to the Government’s payment approval decisions.  Relators’ three other claims were dismissed for failure to state a claim upon which relief can be granted or lack of subject-matter jurisdiction.

Facts:  Relators Harris and Boonie worked for Defendant Dialysis Corporation of America ("DCA") for approximately one year and both former employees’ responsibilities related to billing. 

In their suit against DCA Relators alleged Defendant violated four provisions of the FCA, 31 U.S.C. §3729 et seq. by knowingly presenting false or fraudulent claims for payment or approval to the Government, knowingly making false records or statements to get false or fraudulent claims paid or approved by the Government, conspiring to defraud the Government by getting false or fraudulent claims paid, and knowingly making false records or statements to conceal, avoid, or decrease obligations to pay the Government.  Specifically, Relators alleged Defendant altered Social Security numbers on medical claims, changed patients’ BMI numbers on medical claims, overbilled for Epogen, and overbilled D.C. and Ohio Medicaid.

Defendant moved to dismiss the Relators' complaint under Rule 12(b)(6) for failure to state a claim upon which relief can be granted.  Defendant’s motion to dismiss was granted in part and denied in part.

Analysis:  The Court first analyzed Relators’ allegation that Defendant altered Social Security numbers on Medicare claims.  The Court examined whether the alleged inaccuracy of the Social Security numbers was material to the Government’s decision to pay for or approve the claims, because the governing standard in the Fourth Circuit at the time this case was filed required a false statement to be material to the Government’s payment approval decision.  UnitedStates ex rel. Berge v. Bd. Trs., Univ. of Ala., 104 F.3d 1453, 1459-60 (4th Cir. 1997).  A false statement is “material” in the context of FCA claims if it “has a natural tendency to influence agency action or is capable of influencing agency action.”  Id. at 1460.  Since the Government relies on information other than just Social Security numbers to process Medicare claims, the Court found no plausible inference that inaccurate Social Security numbers were capable of influencing agency action.  The Court could not infer that Defendant made false, material statements to the Government in violation of the FCA, and therefore Relators’ allegations as to Social Security numbers failed to state a claim under Rule 12(b)(6).

The Court then investigated Relators’ claim that Defendant changed patients’ BMI numbers on medical claims in order that patients would qualify for Medicare reimbursement for excess dialysis treatments.  Relators stated that on multiple occasions, they personally observed Defendant enter the billing system and alter BMI numbers without the proper physician authentication.  Because a patient’s BMI number must be above a certain threshold for excess dialysis treatments to qualify for Medicare reimbursement, the Court found that these false statements were material and Relators stated a valid claim upon which relief could be granted.

Next, the Court analyzed Relators’ claim that Defendant overbilled for Epogen.  The Court found that this claim failed under both Rule 12(b)(1) for lack of subject matter jurisdiction and Rule 12(b)(6).  The claim failed under Rule 12(b)(1) because the first-to-file bar contained in the False Claims Act prevents bringing false claims actions related to civil actions for false claims already filed.  31 U.S.C.A. 3730(b)(5).  The Fourth Circuit follows a “same material elements” test when considering whether a fraud claim is barred under the first-to-file bar.  United States ex rel. Carter v. HalliburtonCo., 710 F.3d 171, 181-82 (4th Cir. 2013).  This claim failed because when Relators’ claim was filed, another case against Defendant was before the Court alleging the same material elements for overbilling of Epogen.

Finally, the Court considered the claim that Defendant overbilled D.C. and Ohio Medicaid.  Because Relators did not allege this fraud claim with particularity, the claim failed to meet the pleading standards of Rule 9 (b) and was dismissed.

The full opinion is available in PDF here.

Tuesday, November 19, 2013

Prospect Capital Corporation v. Adkisson, Sherbert & Associates (4th Circuit)

Filed: November 7, 2013 (unpublished)
Opinion by: Judge Andre Davis 

Held: the United States District Court for the Western District of North Carolina was not clearly erroneous and did not abuse its discretion  in ruling that (1) the parties reached a binding and enforceable oral settlement agreement; and (2) plaintiff did not proceed in bad faith, so neither a dismissal with prejudice nor an award of attorney's fees was appropriate.

Facts: Plaintiff made a $12 million commercial loan to a third party. After the third party borrower filed a voluntary Chapter 11 petition (which was converted to a Chapter 7 liquidation), plaintiff sued several defendants for the gross misconduct of their officers and directors.  Plaintiff entered into settlement negotiations with one such defendant, the third party borrower's accounting firm.  Even though counsel for plaintiff and defendant exchanged several draft settlement agreements, plaintiff refused to execute the agreement.  Defendant moved to enforce the purported agreement, to dismiss the complaint, and for an award of attorney's fees. 

Plaintiff alleged that defendant was negligent in providing inaccurate information about borrower's financial condition.  Counsel for the parties exchanged several emails and telephone conversations, during the last of which they agreed that defendant would pay plaintiff a sum certain in exchange for a dismissal of the action with prejudice.  Plaintiff stated in a court filing that the parties "have agreed to the principal terms of the settlement agreement, but require additional time to complete the drafting and execution of the settlement agreement." 

In November and December of 2011, the parties exchanged a total of six drafts, each containing the same material terms, including merger and integration clauses.  The parties eventually negotiated a "final" Confidential Settlement Agreement.  Defendant emailed an executed copy of the written agreement to plaintiff, followed a week later by the settlement check.  The day after defendant mailed the settlement check, plaintiff filed additional papers with the court requesting an extension of time and again representing that the parties "have agreed to the principal terms of the settlement agreement, but require additional time to complete the drafting and execution of the settlement agreement."  "Alas," the Fourth Circuit lamented, "the new year brought a refusal by [plaintiff] to execute the Confidential Settlement Agreement."  Plaintiff returned the settlement check to defendant and stated that it would not be executing a settlement agreement with defendant. 

Defendant moved to enforce the purported agreement, to dismiss the complaint, and for an award of attorney's fees.  After a hearing, the district court ruled that the parties agreed on the material and essential terms of a settlement.  The district court reasoned that several months of emails between counsel demonstrated an enforceable agreement because the material terms were settled.  Those terms included payment price and costs per side, mutual releases, and a confidentiality requirement.  The district court found that choice-of-law and venue provisions were not material terms because plaintiff accepted them willingly and without demanding additional consideration.  It found further that plaintiff's apparent dissatisfaction with the settlement amount was "simply a risk of litigation and the nature of its investment business . . . which are insufficient to set aside the remaining agreement."  Finally, the district court ruled that plaintiff was estopped from denying the existence of the agreement, after it had twice represented to the court that the parties had reached a settlement. 

The district court granted in part defendant's motion, ordering the parties to file a notice of settlement within 30 days.  The court denied defendant's motion for dismissal with prejudice, ruling that plaintiff had not acted in bad faith as required to support a dismissal with prejudice other than on the merits by FRCP 41(b).  Absent bad faith, the district court also declined to award attorneys' fees to ASA. 

Analysis: The Fourth Circuit held that the district court was not clearly erroneous in finding that the parties had settled on the material terms of the settlement agreement during a telephone conversation on November 22, 2011. The Fourth Circuit noted that plaintiff never made the agreement contingent on approval by its senior management, that there was no record evidence that the agreement depended on the execution of a writing, and that plaintiff represented to both defendant and to the district court that the parties had reached a settlement.  The Court declined to consider as moot defendant's cross appeal on the issue of bad faith and attorney's fees. 

The Fourth Circuit held further that the district court was not clearly erroneous in identifying the material terms of the agreement, and classifying as immaterial the choice of law, venue, and release provisions.  Plaintiff accepted quickly and without further consideration defendant's change of the choice of law and venue provisions from New York to North Carolina, demonstrating that these terms were not of "paramount importance" to Plaintiff.  The release provision was not a material term because defendant disputed it only once and ultimately accepted it.  Unlike a case cited by plaintiff, Chappel v.Roth , 548 S.E. 2d 499 (N.C. 2001), the parties did not condition their settlement on the negotiation of a specific release provision. 

Reviewing under a deferential clearly erroneous / abuse of discretion standard, the Fourth Circuit appeared to approve of the district court's consideration of the evidence.  The Fourth Circuit stated that it was "entirely proper for the district court to hear the evidence of the sequence of events that took place during the negotiations, as well as the settlement amounts considered and finally agreed upon." It stated further that the district court was correct in looking past the merger and integration clauses in the written settlement agreement.  That agreement was not fully executed because plaintiff did not sign it; "thus, those provisions could not, and did not, guide the district court's inquiry[.]"

The full opinion is available in .pdf.

Friday, November 8, 2013

Dolan v. McQuaide (Ct. of Special Appeals)

Filed: November 5, 2013
Opinion by: Judge Albert J. Matricciani, Jr.

Held: (1) There was no dispute of material fact on plaintiff's breach of contract and promissory estoppel claims where parties had discussed that plaintiff would help to "plan" the opening of the car wash business, but had not discussed or agreed upon the scope of plaintiff's services.

(2) There was a dispute of material fact on plaintiff's claims for unjust enrichment where there was record evidence of the fair market value of her services.

Facts: The plaintiff and defendant, began a romantic relationship in 1997. They were engaged to be married in 2002. Between 2000 and 2002, they decided to open a car wash business. In exchange for her efforts in planning the business, the defendant agreed that the plaintiff was to be an equal partner in the car wash business and share net profits. The plaintiff performed various services for the car wash business, including drafting a business plan, making financial projections, creating a web site, and writing contracts for the defendant to use with investors and service providers. In 2005, shortly before the car wash was to open, the parties ended their personal and professional relationship. The defendant did not compensate the plaintiff as promised. The plaintiff sued for breach of contract, promissory estoppel, accounting and unjust enrichment.The defendant moved for summary judgment on all claims and prevailed.

Analysis: Breach of Contract and Promissory Estoppel Claims: a breach of contract claim cannot stand if terms are vague or uncertain. Robinson v. Gardiner, 196 Md. 213, 217 (1950). A clear and definite promise is required to sustain a claim of promissory estoppel. Pavel Enterprises, Inc. v. A.S. Johnson Co., Inc., 342 Md. 143, 166 (1996). Here, the parties spoke only in general terms about what the plaintiff would do in exchange for a share in the business. There was thus insufficient specificity to determine whether the plaintiff satisfied her obligations under the agreement. See Mogavero v. Silverstein, 142 Md. App. 259, 273 (2002). The plaintiff performed services, but she did so without having discussed them in detail at the time the alleged oral contract was formed.  Conduct alone cannot form an oral contract or bind another party in promissory estoppel. See generally Alternatives Unlimited, Inc v New Baltimore City Bd. of Sch. Comm'rs, 155 Md. App. 415 (2004). Moreover, there was no evidence from which a fact-finder could reasonably infer a definite set of promises sufficient to give rise to contract or promissory estoppel claims. Thus, there was no dispute of material fact on the claims of breach of contract and promissory estoppel, and summary judgment for the defendant was proper.

Unjust Enrichment Claim: an unjust enrichment claim arises where there are three elements present: (1) a benefit conferred upon the defendant by the plaintiff; (2) appreciation or knowledge by defendant of the benefit; and (3) acceptance or retention of benefit such that it's inequitable for defendant to retain without payment of its value.  Hill v. Cross Country Settlements, LLC, 402 Md. 281, 295 (2007). The appropriate remedy for unjust enrichment is restitution for the plaintiff such that the defendant is no better or worse than he was ex ante. Assessing damages requires a computation of the value of the benefit actually received by the defendant. Here, the plaintiff provided evidence of the fair market value of the services she provided. While the fair market value did not conclusively establish the actual value of her services, such evidence created a genuine issue of fact for the fact-finder. Thus, summary judgment for the defendant on the unjust enrichment claim was unwarranted.

The full opinion is available in .pdf.

Monday, September 30, 2013

Boiardi v. Freestate (Maryland U.S.D.C.)

Filed: September 25, 2013
Opinion by: Judge Ellen Lipton Hollander

Held: Question of fact precluded summary judgment where a plaintiff homeowner sued her insurance broker for negligence in failing to obtain insurance for the homeowner's property, and the broker was unable to demonstrate that there was no material dispute that insurance could not have been obtained for the property.

Facts: Plaintiff and her late husband were owners of a home.  At its purchase in 2000, the home was insured through Chubb Insurance Company ("Chubb").  Following the death of her husband in 2007, the insurance premium for the home was not paid and on August 20, 2008, Chubb canceled the policy for nonpayment.  The mortgagee, Washington Mutual Bank ("WMB"), pursuant to the deed of trust, obtained a lender-placed insurance policy at a higher annual premium than the Chubb policy.  WMB billed this premium to the escrow account for the home loan.  Plaintiff subsequently learned of WMB's actions and contacted her insurance broker, the Defendant,  on January 9, 2009. She requested that the Defendant find less expensive insurance for the home.

The Defendant, with the assistance of an associate, contacted two other insurers to find alternate insurance for the property, including AIG, however, the broker failed to secure coverage.  While the application for coverage with AIG was pending, a fire broke out in the garage of the home resulting in substantial damage to the home and its contents. A claim was apparently made against the policy obtained by the bank. That insurance company issued a check payable to the Plaintiff's deceased husband on October 5, 2009 for a portion of the loss. However, the Plaintiff failed to cash the check or otherwise have ASIC re-issue the payment prior to the foreclosure sale of the home in 2010. The Plaintiff subsequently brought this action against the Defendant for negligence, breach of fiduciary duty, negligent misrepresentation, intentional misrepresentation, and fraud.  Following discovery, the Defendant moved for summary judgment on all counts.

Analysis: Under Maryland law, an insurance broker, retained to obtain insurance, may be liable for negligence to his employer if he (1) fails to obtain a policy and (2) fails to inform his employer of his failure to obtain the insurance.  See Intl. Bhd. of Teamsters v. Willis Corroon Corp. of Md., 369 Md. 724 (2002).  Alternately, a broker can be liable to his employer if he fails to exercise reasonable diligence and due care, resulting in a void or defective policy issuing to the employer.  See Lowitt v. Pearsall Chem. Corp. of Md., 242 Md. 245 (1966).  In order to prevail on a claim based in negligence in Maryland, a plaintiff has the burden to prove that the defendant had a duty of care, which he breached, proximately causing the plaintiff's damages.  See 100 Inv. Ltd. P'ship v. Columbia Town Ctr. Title Co., 430 Md. 197 (2013).  Unavailability of insurance is an affirmative defense of the defendant broker.  The defendant raising this defense has the burden to demonstrate insurance was not available in order to prevail.  United Capitol Ins. Co. v. Kapiloff, 155 F.3d 488 (4th Cir. 1998).

The Defendant argued that neither insurer he approached would have issued insurance because of the prior policy cancelation, the home itself had a poor insurance rating, one insurer approached by the Defendant had denied coverage, and the Defendant's expert opined that AIG would have ultimately denied insurance even if the property had not been lost to a fire while the application was pending.

The Court found that there was a genuine material dispute as to the insurability of the property because the home had previously been insured, was subsequently insured under the policy obtained by the bank, and a jury could have decided that AIG would have issued a policy based on statements made by the AIG underwriters prior to the fire loss.  Summary judgment as to Plaintiff's action for negligence was therefore denied.

The full opinion is available in .pdf.

Wednesday, August 21, 2013

Raglani v. Ripken Professional Baseball, d/b/a Aberdeen Ironbirds (Maryland U.S.D.C.)

Filed: April 16, 2013
Opinion by Judge Catherine C. Blake

Held: Agreement requiring at-will employee to arbitrate disputes with employer, which recited only hiring and continued employment as consideration, which did not require employer to arbitrate, and which gave employer unilateral control over pool of potential arbitrators, was held unenforceable because it lacked mutuality of consideration and denied the employee access to a neutral arbitral forum.

Facts: Plaintiff was an employee at the Defendant company who was terminated in 2011.  Plaintiff alleged that she was discriminated against and terminated because of her gender and filed suit under Title VII of the Civil Rights Act of 1964 and Maryland state law.

When Plaintiff commenced employment with the Defendant company, she signed a Problem Support Policy that included “a valid and binding” arbitration agreement under which employees of the Defendant company promised to arbitrate disputes in consideration of only the employees’ hiring and continued employment.  Defendant had exclusive control over the list of potential arbitrators.  When an employee of Defendant elected to arbitrate a dispute, Defendant was to provide the employee with its list of qualified arbitrators from which the employee could choose.  The agreement required employees of the Defendant company to arbitrate but did not require the Defendant company to follow similar procedures or submit to arbitration.

Defendant filed a motion to dismiss or to stay and compel arbitration pursuant to the arbitration agreement signed by Plaintiff.

Analysis: Although the court acknowledged the Fourth Circuit’s liberal policy toward arbitration agreements, it emphasized it still must evaluate arbitration agreements as contracts.  The court therefore first analyzed whether the arbitration agreement was valid and enforceable.  The court found two independent reasons the arbitration agreement was unenforceable: (1) the agreement lacked consideration and (2) the agreement denied employees access to a neutral forum.  Because the arbitration agreement was unenforceable the court denied Defendant’s motion to dismiss the case or to stay and compel arbitration.

First, like all contracts, arbitration agreements must contain adequate consideration.  Cheek v. United Healthcare of Mid-Atlantic, Inc., 835 A.2d 656, 661 (Md. 2003); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967); Noohi v. Toll Bros., Inc., 708 F.3d 599, 609 (4th Cir. 2013); Hill v. Peoplesoft USA, Inc., 412 F.3d 540, 543-44 (4th Cir. 2005).  The court followed the logic laid out in Cheek, supra, to conclude that employment or continued employment is not alone adequate consideration for an employee’s promise to arbitrate.  Cheek, 835 A.2d at 666.  Because it did not require Defendant to submit to arbitration, the arbitration agreement was entirely “one-directional” and therefore lacked mutuality of consideration.

Second, even if the arbitration agreement did have adequate consideration, it denied employees access to a neutral forum.  Although there is uncertainty as to whether an arbitration agreement that denies one party access to a neutral forum results in unconscionability, a material breach, or simply unenforceability of the agreement, courts agree that denial of access to a neutral forum in an arbitration agreement may make the agreement unenforceable.  Muriithi v. Shuttle Exp., Inc., 712 F.3d 173, 176 (4th Cir. 2013); Hooters of America, Inc. v. Phillips, 173 F.3d 933, 938-39 (4th Cir. 1999); Murray v. United Food & Commercial Workers Int’l Union, 289 F.3d 297, 302 (4th Cir. 2002).

Here the arbitration agreement denied Plaintiff access to a neutral forum because Defendant had exclusive control over the list of arbitrators from which employees were required to select.  In the Fourth Circuit an employer may not retain this exclusive right.  Murray, 289 F.3d at 303.  Defendant’s promise in the agreement to provide a list of impartial arbitrators was not deemed sufficient to overcome the lack of mutuality in the arbitration selection process.  In addition the arbitration agreement was vague with respect to the rules to be followed, thereby providing a further reason to challenge the neutrality of the forum.

The full opinion is available in PDF here.
Post written by Maria A. Stubbings

Wednesday, July 10, 2013

Coleman v. Soccer Association of Columbia (Ct. of Appeals)

Filed: July 9, 2013
Opinion by Judge John C. Eldridge

Held: The defense of contributory negligence remains the law in Maryland. While the Court has the authority to change the rule, it declines to do so out of deference to the legislature.

Facts: The plaintiff was coaching soccer for the defendant soccer association. While standing in front of a soccer goal, the plaintiff jumped up and grabbed onto the front crossbar. The goal was not anchored to the ground. The plaintiff fell backward, drawing the weight of the crossbar onto his face. He was severely injured.The plaintiff sued the defendant. At trial, the defendant argued that the condition of the goal was open and obvious and that the accident was caused by the plaintiff's own negligence.

The jury returned a verdict finding that the defendant was negligent and the plaintiff was negligent also. On the basis of the doctrine of contributory negligence, the trial court entered judgment in favor of the defendant. The plaintiff appealed and challenged the viability of the contributory negligence defense as a legal doctrine in Maryland.

Analysis: The opinion contains an analysis of the history and policy behind the defense of contributory negligence. It also contains an analysis of the Court's authority to abrogate the common law, concluding that the Court could change the common law rule of its own accord. The Court notes, however, that since the rule was last affirmed by the Court in Harrison v. Montgomery County Bd. of Educ., 295 Md. 442, 444, 456 A.2d 894 (1983), the Maryland General Assembly has continually considered and failed to pass bills that would abolish or modify the rule. The failure of so many bills "is a clear indication of the legislative policy at the present time." The Court concludes that where the General Assembly has endorsed a public policy, the "Court will decline to enter the public policy debate, even when it is the common law that is at issue and the Court certainly has the authority to change the common law." On that basis, the Court affirmed the trial court.

Dissent: Judge Harrell, joined by Chief Judge Bell, wrote a dissenting opinion that concurs that the Court has the authority to abrogate the common law. It goes further and states that the Court need not defer to continued legislative inaction. It points out that, since 2003, the General Assembly has considered the adoption of comparative negligence only one time. In that context, legislative inaction need not be taken as endorsement of a public policy favoring contributory negligence. Ultimately, the dissent argues that the Court should adopt "pure comparative fault" as the controlling standard, whereby damages are apportioned among the parties according the percentage that each party's negligence contributed to the injury.

The full opinion is available in .pdf.

Monday, June 17, 2013

Deutsche Bank Nat’l Trust v. Brock (Ct. of Appeals)

Filed: March 22, 2013
Opinion by Judge Glenn T. Harrell, Jr.

Held: Where there is no gap in the indorsements purporting to transfer a negotiable promissory note and the last indorsement, made by a holder, is made in blank, the person in possession of the note is the “holder” of such note and entitled to enforce it without proving how possession of the note was acquired.

Facts: On September 28, 2006, the respondent homeowner executed a promissory note (“Note”), secured by a deed of trust, to her lender in order to finance her purchase of residential real property.  Her lender sold and securitized the loan.  When a loan is securitized, it is sold to an investment bank, which bundles it with other mortgages in a “special purpose vehicle,” usually in the form of a trust, and sells the income rights to investors.  Governed by a pooling and servicing agreement, the trust is maintained by a trustee, who manages the loan assets, and a servicer, who collects the monthly payments from the mortgagors.  The Note in the present case was sold and indorsed three times, with the last indorsement being in blank.  The Note was securitized into a trust managed by the petitioner trustee and servicer.  The petitioner servicer indisputably had possession of the Note. 

In 2009, the respondent homeowner defaulted on the Note and the petitioner servicer initiated foreclosure proceedings.  In response to the foreclosure sale of her home, the respondent homeowner brought a separate action against the substitute foreclosure trustees, the petitioner trustee, and the petitioner servicer, alleging, among other claims, that the petitioner servicer did not have the authority to foreclose the Note.  On December 6, 2010, the Montgomery County Circuit Court granted summary judgment in favor of the petitioners, finding that there was no material fact in dispute that the petitioners had the authority to enforce the Note.  In an unpublished opinion, the Special Court of Appeals reversed the lower court, finding, in pertinent part, that a genuine issue of material fact existed because, under the Court of Appeals’ decision in Anderson v. Burson, 424 Md. 232 (2012), the petitioner servicer, characterized by the Couirt of Special Appeals as a “nonholder” in possession of the Note, was required to prove the transfer history of the Note and that it had the rights of a holder, which it had not done at trial.  The Court of Appeals granted certiorari to determine whether, under Title 3 of the Maryland UCC and the Court of Appeals’ decision in Anderson, an entity in possession of a promissory note indorsed in blank is not a holder and merely a nonholder in possession without the rights of a holder. 

Analysis:  The Court of Appeals first analyzed the UCC to determine the petitioner servicer’s relationship to the Note.  The UCC requires the maker of a promissory note to pay the obligation to “a person entitled to enforce the instrument.”  Md. Code Ann. Com. Law § 3-412.  The instrument may be enforced by “(i) the holder of the instrument, [or] (ii) a nonholder in possession of the instrument who has the rights of a holder.”  Id. at § 3-301.  The Court determined that a holder is a person in possession of a note, which is either specially indorsed to that person or indorsed in blank.  The last indorsement stated:



Therefore, the Court concluded that the Note was indorsed in blank.  The petitioner servicer, having possession of the Note indorsed in blank, was a holder and was entitled to enforce the Note.

In further analysis, the Court considered whether Anderson applied to this instant case.  In Anderson, the Court held that the possessor of an unendorsed note was only a non-holder of the Note and must prove the proper transfer of the note and the rights of the holder in order to have the authority to enforce the Note. The Court found that here, by contrast, the Court of Special Appeals had improperly applied Anderson because the Note’s indorsements were proper and without any gaps.  The petitioner servicer was in possession of a note endorsed in blank by the last holder. Consequently, the petitioner servicer was not a non-holder in possession but rather the holder of the Note, with authority to enforce it.  The Court of Appeals therefore reversed the Court of Special Appeals.

The full opinion is available in PDF.

Thursday, June 13, 2013

Corvex Management LP v. Commonwealth REIT (Cir. Ct. Balto. City)

Filed: May 8, 2013
Opinion by Judge Audrey J.S. Carrion

Shareholders seeking a hostile takeover of a publicly traded REIT are bound to arbitrate their disputes with the REIT and its board of trustees under a bilateral agreement to arbitrate stated in the REIT’s bylaws.  Plaintiff's Petition to Stay Arbitration was denied.

Plaintiffs are New York investment firms each holding approximately 4.90% of the publicly traded stock of the Defendant REIT, organized in Maryland.  Plaintiffs brought suit in the Circuit Court for Baltimore City alleging breaches of fiduciary duty when the Defendant REIT and its board of trustees opposed Plaintiffs’ unsolicited hostile takeover bid.  Defendants responded by filing to initiate arbitration under provisions for arbitration stated in the Defendant REIT’s bylaws. Plaintiff’s countered with a petition to the Circuit Court to stay the arbitration. The Court considered the petition after first denying an emergency motion for a temporary stay of arbitration.

Neither party disputed the fact that it is within the province of the Court to determine whether the dispute should remain before the Circuit Court or be stayed pending arbitration.  Under the Maryland Uniform Arbitration Act (MUAA), “[i]f a party denies the existence of the arbitration agreement, he may petition the court to stay . . . arbitration proceedings.” Md. Code Ann., Cts. & Jud. Proc. §3-208(a).  If a court finds that the existence of a valid and enforceable arbitration agreement is in substantial dispute, the court must try the issue promptly and order a stay if it finds for the petitioner.  If the court finds that a valid and enforceable arbitration agreement exists, the court must order the parties to proceed with arbitration. 

Noting without analysis that the parties did not contest that both the MUAA and the Federal Arbitration Act (FAA) applied in this case, the Court found that Maryland and Delaware state courts and federal courts generally have expressed a policy strongly in favor of arbitration.  The Court noted authority argued by Plaintiffs, including Noohi v. Toll Bros. Inc.,  708 F.3d 599, 611 n.6 (4th Cir. 2013), and Kirleis v. Dickie, McCamey & Chilcote, P.C., 560 F.3d 156, 160 (3rd Cir. 2009), to the effect that in first deciding whether the parties have entered into an agreement to arbitrate ordinary state-law principles of the formation of contracts should apply without any presumption in favor of arbitration.  However, the Court essentially distinguished those cases. The Court noted that the footnote reference in Noohi concerned an ambiguity as to which persons were bound by the arbitration agreement and Kirleis also applied to a determination of who is bound to arbitrate in sense of comprehending being bound and manifesting some asset to be bound. Recognizing that the federal policy favoring arbitration “does not extend to situations in which the identity of the parties who have agreed to arbitrate is unclear, McCarthy v. Azure, 22 F.3d 351, 355 (1st Cir. 1994), the Court reasoned that there is a difference between realizing that one is party to an agreement, yet refusing to consent to it, and failing to comprehend that an agreement to which one is subject to exists altogether. Plaintiffs in this case had constructive knowledge, and, in fact, actual knowledge, that they were a party to an arbitration agreement written into the Defendant REIT’s bylaws.  The Court concluded that this case was distinguishable from Noohi and examined the arbitration issue keeping in mind that both state and federal law cast a favorable light on arbitration.

On the merits, Plaintiffs were sophisticated parties, two of the largest shareholders of the REIT and the terms of the arbitration agreement contained in the bylaws were clear in requiring shareholders to arbitrate disputes under a broad, all encompassing clause. The Plaintiffs’ assent to the arbitration agreement was established under Maryland law by their prior constructive knowledge of the REIT’s bylaws, based on stock certificate legends stating they would be bound to the bylaw terms, and actual knowledge evident from the complaint the Plaintiffs filed at the time they acquired more than 5% of a voting class of the REIT stock, which sought a judicial declaration that the bylaw agreement to arbitrate was unenforceable.

Finally, the Court reasoned the REIT’s bylaws were not invalid or unenforceable for lack of consideration because both parties agreed to arbitrate and Plaintiffs voluntarily purchased the Defendant REIT’s stock while knowing of the arbitration agreement. Holding that mutuality of consideration existed, the Court dismissed Plaintiffs’ argument that the arbitration agreement was one sided or illusory even though Defendants could amend the bylaws because the Defendants’ power to amend the bylaws was rooted in the declaration of trust and Maryland REIT law, not within the “four corners” of the bylaws themselves. Under Cheek v. United Healthcare, 378 Md. 139, 155, 835 A.2d 656 (2003), Maryland courts are not permitted, when assessing the enforceability of an arbitration agreement, to go beyond the confines of the arbitration agreement itself to examine the larger contract in which it is found.

The full opinion is available in PDF.