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  In an unpublished opinion, the Special Court of Appeals reversed the lower court, finding, in pertinent part, that a genuine issue of material fact existed because, under the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.


Thursday, June 6, 2013

Consortium Atlantic Realty Trust, Inc. v. Plumbers & Pipefitters National Pension Fund, et al. (Cir. Ct. Mont. Co.)

Filed:  February 5, 2013
Opinion by Judge Ronald B. Rubin

Held:  A board of directors is not subject to Revlon duties when shareholders choose to exercise their put rights under a shareholders agreement.

Facts:  Plaintiff, a Maryland corporation, sued Defendants, union pension funds who owned approximately 93% of the stock in Plaintiff, for breach of a shareholders’ agreement entered into between Plaintiff and Defendants.  Under the shareholders’ agreement, each Defendant was granted the unilateral right to withdraw as a shareholder six years after the effective date of the agreement. Defendants gave proper notice of the exercise of their withdrawal right under the shareholders’ agreement, but the parties disputed the valuation of Defendants’ shares under the withdrawal right. The pertinent section of the shareholders’ agreement required Plaintiff to redeem all of the shares held by a withdrawing shareholder at fair market value. Plaintiff set the fair market value of Defendants' shares at $7.93 per share, the price set forth in an appraisal of one share of stock done two years earlier.  Defendants refused to accept any “discounted” value for their shares, insisting on redemption at $10.00 per share, the price initially paid by Defendants for each share.

Plaintiff filed suit for breach of the shareholders’ agreement. Defendants filed a counterclaim raising a number of claims regarding the shareholders’ agreement and its interpretation, the most pertinent of which was Plaintiff’s failure to maximize shareholder value. Plaintiff moved to dismiss the counterclaim.

Analysis:  Defendants alleged a breach of fiduciary by Plaintiff and certain of its directors by failing to sell the company before Defendants exercised their withdrawal rights so that the directors could obtain a “windfall” when Defendants redeemed their shares for a discounted value. Defendants also contended that the exercise of their withdrawal rights, which collectively amounted to 93% of Plaintiff’s shares, constituted a change-in-control transaction under Maryland law. In short, the court stated that Defendants were attempting to impose Revlon duties, as applied to Maryland law in Shenker v. Laureate Education, on Plaintiff and its directors.

The court agreed that Shenker is limited, until the Court of Appeals says otherwise, to a cash-out merger when the decision to sell the corporation is already made, and dismissed Defendants’ claims. Here, it was the shareholders, not the board of directors, who made the decision to “sell”, i.e., to exercise their put rights under the shareholders’ agreement. Much like a tender offer situation, the decision to be made, withdraw as, or remain a shareholder does not implicate the duties or functions of the board of directors. Revlon duties were inapplicable because the board had nothing to do with the decision to “sell.”

The court also rejected Defendants’ change of control argument, stating that shareholders cannot unilaterally “create” a change of control implicating Revlon solely by virture of their own decisions. Revlon duties are premised upon action taken by the board, which results in a change from managing the company to selling the company. Plaintiff’s board made no decision to sell, merge or otherwise re-organize the business of the company.  Shareholders cannot impose additional duties on a board solely by reason of their own economic decisions to involve provisions of a shareholders’ agreement.

The full opinion is available in pdf.