TBC, Inc. v. DEI Holdings, Inc. (Maryland U.S.D.C.)

Filed: March 24, 2015

Opinion by: Catherine D. Blake

Holdings:

(1)   A corporate entity, in acquiring the assets of a predecessor, cannot be held liable solely based on continued use of a predecessor’s trade name, sale of a predecessor’s products, and retention of some of a predecessor’s accounts and employees.  

(2)   When a party does not allege facts to show that a corporate parent used its subsidiary “as a mere shield for the perpetration of fraud,” that party does not state a claim against the parent for the subsidiary’s obligations.

(3)   A party may state a claim for breach of contract without alleging perfect performance of its own obligations under the contract.

(4)   Maryland law does not recognize an independent cause of action for breach of the implied covenant of good faith and fair dealings.

(5)   A party may obtain restitution on the theory of unjust enrichment, despite the existence of an express contract, when the party breaches the express contract.

Facts:

Parent Defendant ("Parent") was the corporate parent of two subsidiaries, Subsidiary 1 and Subsidiary 2.  Additionally, four divisions of Parent were unincorporated until they formed LLCs in February 2014. 

Plaintiff, an advertising and public relations agency, was hired by Subsidiary 1, a consumer electronics vendor, to provide marketing services.  In 2011, Subsidiary 1 agreed to pay Plaintiff $12,500 each month for 83 hours of work per month.  In 2012, Subsidiary 2 hired Plaintiff under a similar agreement.  Plaintiff performed work beyond the monthly retainer for both entities and was paid additional fees accordingly. 

Subsidiary 1 later retained Plaintiff to perform advertising and marketing services for a new line of products on the terms outlined in the 2011 contract.  In 2013, Plaintiff worked 3,000 more hours than the 83 hours per month contemplated in the 2011 contract.  Despite this additional work, Plaintiff was paid monthly fees in 2013 based on the budgeted 83 hours per month.  Based on the experience of its leadership, Subsidiary 1 knew based on the nature of the requested work that it would require substantially more than 83 hours each month. 

In June 2013, Plaintiff’s Executive Vice President (the “VP”) met with three executives of Parent to discuss compensation for Plaintiff’s work in excess of the monthly budget.  The executives assured the VP that Plaintiff would be paid in full for the additional hours.  In August 2013, one of Parent's executives again told the VP that Plaintiff would be paid in full, and Plaintiff continued to perform more work until the Parent's executives informed the VP in January 2014 that Plaintiff’s services would no longer be needed.  Plaintiff was never paid for the 3,000 hours of additional work performed in 2013.

In February 2014, four LLCs (the “LLC defendants”) were formed from the four unincorporated divisions of Parent.  Subsidiary 1 also merged into Subsidiary 2. 

In September 2014, Plaintiff sued Parent, Subsidiary 1, Subsidiary 2 and the four LLCs alleging, inter alia, breach of contract, breach of the covenant of good faith and fair dealings, and unjust enrichment.  All defendants moved to dismiss. 

Analysis: 

(1)   The court first considered whether Plaintiff stated a claim against the LLC defendants.  Under the general rule of corporate successor liability, a corporate entity acquiring assets from another entity does not acquire the liabilities of its predecessor.  An exception is where the successor entity is a “mere continuation or reincarnation” of the predecessor entity.  The exception applies where there is continuity among directors and management, common shareholder interest, and, in some cases, inadequate consideration in the transaction.  Use of the predecessor’s trade name, sale of a predecessor’s products, and retention of the predecessor’s accounts and employees will not alone suffice.  Because the contracts predated the existence of the LLC defendants, and Plaintiff only alleged the latter three factors, Plaintiff failed to state a claim against the LLC defendants.

(2)   Next, the court considered Plaintiff’s claims against Parent.  In general, a parent corporation is not liable for the obligations of its subsidiaries.  The “corporate veil” may be pierced only in circumstances when it is necessary to prevent fraud or enforce a paramount equity, i.e., when the parent uses the subsidiary as a “mere shield” to commit fraud.  Plaintiff never contracted directly with Parent, but instead it contracted with Subsidiary 1 and Subsidiary 2.  Because Plaintiff did not allege facts to support Parent’s use of its subsidiaries to perpetuate fraud, Plaintiff failed to state any cause of action against Parent. 

(3)   The court then turned to Plaintiff’s contract claim against Subsidiary 2.  To state a claim for breach of contract under Maryland law, a plaintiff must only show (1) the existence of a contractual obligation owed by defendant to the plaintiff and (2) a material breach of that obligation by the defendant.  A plaintiff is not required to show that it complied with every procedural obligation described in the agreement.  Here, Plaintiff did not allege that it had obtained approval for additional work or that timely billed for the work, but these omissions were not fatal to the claim.  Plaintiff met its burden by alleging that (1) Subsidiary 2 was contractually obligated to pay for additional services beyond those contemplated in the 83 hour budget and (2) Subsidiary 2 failed to pay Plaintiff in breach of that obligation. 

(4)   The court dismissed Plaintiff’s claim of breach of the covenant of good faith and fair dealings, noting that Maryland does not recognize this as an independent cause of action.

(5)   Lastly, the court addressed Plaintiff’s unjust enrichment claim.  In Maryland, a claim of unjust enrichment may not be brought where the subject of the claim is covered by an express contract.  An exception to this rule occurs when there has been a breach of contract, in which case a party may obtain restitution on the theory of unjust enrichment.  If a jury finds that Plaintiff did not substantially perform under the agreement, thereby rejecting Plaintiff’s contract claim, then Plaintiff may still recover for unjust enrichment.  Both the contract and unjust enrichment claims may stand as alternative, inconsistent theories of liability.

The opinion is available in PDF.

Peckey v. Bank of America, N.A. (Maryland U.S.D.C.)

Filed: April 10, 2015

Opinion by: Richard D. Bennett

Holdings:  The Court denied Defendant Loan Servicer’s motion to dismiss Plaintiff’s claims for violations of three statutes: 1) the Fair Debt Collection Practices Act (“FDCPA”); 2) the Maryland Consumer Debt Collection Act (“MCDCA”); 3) and the Maryland Consumer Protection Act (“MCPA”).

While Defendant Loan Servicer’s communication to collect Plaintiff’s non-existent mortgage debt was time barred under the FDCPA, the Defendant’s more recent false representation regarding the non-existent debt was not time barred.  The Court held Plaintiff sufficiently pled that Defendant Loan Servicer possessed the requisite knowledge to violate the MCDCA.  The Court also held Defendant Loan Servicer’s alleged false reporting of delinquencies plausibly harmed Plaintiff’s credit score and caused him stress and anxiety.  Further, the Court held that Plaintiff sufficiently pled a violation of the MCPA. 

Facts:  Plaintiff defaulted on a loan from Defendant Bank to purchase property (the “Loan”).  To avoid foreclosure, Plaintiff agreed to a Deed in Lieu of Foreclosure transaction (“DIL”) conveying the property to Defendant Bank.  Plaintiff fulfilled all of the requisite steps to complete the DIL.  Shortly thereafter, however, Defendant Bank sent Plaintiff a letter stating his loan would be serviced by Defendant Loan Servicer and Defendant Bank sent Plaintiff another letter stating it was unable to offer Plaintiff a DIL. 

Then, Defendant Loan Servicer sent Plaintiff a letter stating it had taken over loan servicing for Plaintiff’s property and sent Plaintiff a monthly payment notice demanding $55,190.29 for the current payment, past due payment, and late charges/fees.  In response, Plaintiff sent a letter to Defendant Loan Servicer stating that he successfully completed a DIL with Defendant Bank and requested that it cease and desist making debt collection phone calls to him. Defendant Loan Servicer nevertheless continued to demand payment.  Plaintiff’s credit reports showed the DIL terminated the Loan, but that Plaintiff had a deficiency with Defendant Loan Servicer.

Defendant Loan Servicer filed a Motion to Dismiss in response to Plaintiff’s claims under the FDCPA, MCDCA, and MCPA.

Analysis:  FDCPA:  The FDCPA requires that a plaintiff bring a claim within one year from the date on which a violation occurs (15 U.S.C.A. 1692k(d)).  Defendant Loan Servicer’s communication to collect Plaintiff’s non-existent debt occurred more than one year before suit was filed.  However, Defendant Loan Servicer’s false delinquency report to the credit bureaus and Plaintiff’s accessing of his credit reports occurred within one year before filing suit.  Thus, the Court determined that Plaintiff’s FDCPA claim was not barred by the FDCPA’s one-year statute of limitations.       

MCDCA:  Liability arises under Md. Code Ann., Com. Law § 14-202(8) when a defendant acted “with actual knowledge or reckless disregard as to the falsity of the information . . .”  Plaintiff’s allegation that he provided the DIL and other documentation to Defendant Loan Servicer was sufficient to plead that Defendant had “actual knowledge.”  Plaintiff alleged he sent a message to Defendant Loan Servicer indicating the Loan had been satisfied with title transferring by the DIL, that it failed to investigate Plaintiff’s response, and it failed to consider information readily available in Plaintiff’s credit history.  The Court ruled that this was sufficient to plead Defendant Loan Servicer acted with “reckless disregard.”  The Court further stated that, although Plaintiff bears the burden to prove Defendant Loan Servicer’s actions proximately caused his damages, it is plausible its action caused the harm to Plaintiff’s credit score as well as stress and anxiety.  

MCPA: The Court determined that because Plaintiff sufficiently alleged a violation of the MCDCA and a violation of the MCDCA is a per se violation of the MCPA, Plaintiff sufficiently pled a violation of the MCPA.

The full opinion is available in PDF.

Payne v. Erie Insurance Exchange (Md. Ct. of Appeals)

Filed:  March 30, 2015

Opinion by:  Robert N. McDonald

Holding:  Where the first permittee is not present in the vehicle, omnibus coverage does not extend to a second permittee if that driver deviates from an authorized purpose.

Facts:  The named insured owned the vehicle, which was covered by Defendant’s insurance policy.  Defendant’s policy contained an omnibus clause which provided coverage to (1) relatives by blood, marriage, or adoption, and (2) drivers given permission by the named insured. 

Named insured had granted the first permittee unrestricted use of the car, but had forbidden the second permittee from driving the car for any reason.  Despite the named insured’s wishes, first permittee directed the second permittee to use the car to pick up the first permittee's children from school.  Instead of taking a direct route to the school, the second permittee first drove to a nearby gas station and subsequently collided with a car driven by Plaintiffs.

Plaintiffs filed a tort action against the second permittee, the named insured, Plaintiff’s insurer and Defendant insurer.  Writ of certiorari was granted to reconsider whether omnibus coverage extended to second permittee’s use of the car without the presence of the first permittee and outside the scope of authorized use.

Analysis:  Because the first permittee was undisputedly not present in the car when the accident occurred, the court’s analysis turned on the circumstances under which the second permittee operated the vehicle.  The court highlighted jurisprudence showing the disjunctive nature of the test for second permittees as illustrated by Kornke, Federal Insurance Co., and Bond:

“The general rule that a permittee may not allow a third party to use the named insured’s car has generally been held not to preclude recovery under an omnibus clause where (1) the original permittee is riding in the car with the second permittee at the time of the accident, or (2) the second permittee, in using the vehicle, is serving some purpose of the original permittee.”

The court noted the existence of two alternative situations.  In one, where the first permittee was a passenger of the vehicle, authorization of the driver’s actions could be presumed.  Even if the first permittee was not actively directing the car’s operation, mere presence of the first permittee indicated operation for his benefit.  But in the second situation, where the first permittee was absent, the court required clear evidence that the driver operated the vehicle for the benefit of the first permittee in order for the second permittee to retain omnibus coverage.

The court determined that the first permittee became entitled to omnibus coverage as a blood relative regardless of any implied or express consent.  Accordingly, the first permittee possessed unrestricted authority to delegate permission to the second permittee.  But because the second permittee lacked the discretion to use the vehicle as he pleased, his departure from the assigned task excluded him from omnibus coverage.

The full opinion is available in PDF.

In Re: MTBE Products Liability Litigation (New York U.S.D.C.)

Filed: March 30, 2015

Opinion by: Shira A. Scheindlin

Summary:  In a case involving multiple jurisdictions, a federal court held that in the absence of a federal question, the laws of the forum state should control, in this case Pennsylvania. The court then applied Pennsylvania’s choice-of-law rules to hold that the laws of the jurisdiction where the “targeted entity” is incorporated should determine whether to piece the corporate veil. The defendant’s parent company was incorporated in Delaware, but its Maryland subsidiary—the target of the lawsuit—was formed in Maryland. Thus, under the court’s ruling, Maryland’s veil-piercing laws should govern.

The full opinion is available in PDF.

Cunney v. Patrick Communications LLC (Maryland U.S.D.C.)

Filed: April 3, 2015

Opinion by: James K. Bredar

Holding:  Confidential communications between a husband and wife are privileged, regardless of whether the subject matter relates solely to ordinary business matters.

Facts:  Defendant managing members of defendant LLC were also husband and wife.  In connection with discovery, husband and wife asserted marital privilege to bar production of 58 documents involving communications between husband and wife.

Analysis:  Plaintiff argued the documents should be produced in discovery because the communications related to pure business matters unrelated to the spousal relationship.  Plaintiff’s argument relied on a comparison to New York law, which has statutory text similar to Maryland.  The court agreed New York law excludes from the martial privilege conversations related solely to “ordinary business matters.”  However, the court looked to the Maryland Court of Appeals decision in Coleman v. State, which “refused to read exceptions into the marital privilege where the text [(Section 9-105 of the Courts and Judicial Proceedings Article)] itself had ‘no express exceptions.’”  The court found the communications between the husband and wife privileged. 

The court went on to state that the parties must still determine whether the communications were confidential because the privilege does not apply if the communications were “made with the contemplation or expectation that a third party would learn” of the communications.

The opinion is available in PDF.

Allstate Lien & Recovery Corp. v. Stansbury (Ct. of Spec.Appeals)

Filed: October 7, 2014

Opinion by: Kathryn Grill Graeff

Holdings: A fee charged for processing a garageman’s lien is not part of the garageman’s lien per Md. Code, Comm. Law § 16-202 and cannot be included in the amount necessary to redeem a vehicle.

As a result, the jury properly found that including the processing fee in the amount needed to redeem a vehicle violates the Maryland Debt Collection Act (Md. Code, Comm. Law §§ 14-201, et seq.) and the Maryland Consumer Protection Act (Md. Code, Comm. Law §§ 13-301, et seq.).

Facts: Plaintiff authorized in writing some needed repairs to his vehicle by the defendant garage, which charged Plaintiff $6,330.37 for the repairs. After Plaintiff failed to timely pay, the Defendant garage and its manager engaged the Defendant lien and recovery company to begin the process of selling Plaintiff’s vehicle in execution of the Defendant garage’s repair lien.

Plaintiff was sent a lien notice which provided that Plaintiff’s vehicle would be sold at public auction to satisfy the garage’s lien unless Plaintiff paid the $6,330.37 costs of repair, plus a storage fee of $300, plus a processing fee of $1,000, for a total of $7,630.37. Plaintiff had not agreed to any storage fees in his written repair authorization. The Defendant lien and recovery company asserted that although the actual costs incurred may vary from lien to lien, the $1,000 fee was its standard charge for collecting debts and was “front-loaded” to become part of the lien. Plaintiff failed to pay the full lien amount claimed, including the $1,000, and Plaintiff’s vehicle was sold at auction for $7,730.

Analysis: The Court determined that the plain language of the garageman’s lien statute, Md. Code, Comm. Law § 16-202, clearly and unambiguously states that a person who provides a service to, or materials for, a vehicle has a “motor vehicle lien” only for those charges incurred for repair or rebuilding, storage, or tires or other parts or accessories. As a result, a processing fee is not included as part of the lien. The Court reviewed the statutory scheme as a whole and held that, although processing fees may be recovered if the vehicle is sold or if judicial proceedings are instituted, the statutory scheme does not suggest that processing fees are part of the lien that may be included as part of the amount the consumer must pay to redeem the vehicle.

The Maryland Consumer Debt Collection Act, specifically Md. Code, Comm. Law § 14-202, provides that a debt collector may not “[c]laim, attempt, or threaten to enforce a right with knowledge that the right does not exist.” The Court held that Defendants attempted to enforce a right that did not exist by requiring Plaintiff to pay the $1,000.00 processing fee to redeem the vehicle. Defendants had no right to front-load the processing fee and include those fees as part of the lien. Consequently, the Court held the jury properly found that Defendants violated the Maryland Consumer Debt Collection Act and, because such a violation constitutes an unfair or deceptive trade practice, Defendants also violated the Maryland Consumer Protection Act.

The full opinion is available in PDF.  

Falls Garden Condominium Ass’n, Inc. v. Falls Homeowners Ass’n, Inc. (Md. Court of Appeals)

Filed: January 27, 2015

Opinion by: Lynne A. Battaglia

Holding:  A letter of intent may be an enforceable contract where definite terms are included, signaling intent of the parties to be bound, and the material terms of a contract are included.  Further, where the letter of intent is unambiguous and constitutes an enforceable contract, it is unnecessary to have a plenary hearing on the merits of a motion to enforce a settlement agreement

Facts: The appeal arose out of the execution of a letter of intent which was the result of the settlement of litigation over the contested ownership of parking spaces.

Analysis:  Distinguishing Cochran v Norkunas, which held that the parties did not intend to be bound by a letter of intent and it was therefore unenforceable, the Court noted that in the present case the parties expressed their intent to be bound to the letter of intent through the definiteness of terms included therein.

In discerning the enforceability of the letter of intent the Court relied upon the often cited and influential treatise Corbin on Contracts, which divides cases where letters of intent have been an issue into a spectrum with four categories: (i) where the parties specifically say that they intend not to be bound until the formal writing is executed; (ii) cases where the parties clearly point out one or more specific matters on which they must yet agree before negotiations are concluded; (iii) cases where the parties express definite agreement on all necessary terms, and say nothing as to other relevant matters not essential, but that are often included in similar contracts; and (iv) cases like those of the third class, with the addition that the parties expressly state that they intend their present expressions to be a binding agreement or contract, and are thus conclusive as to the parties intent.  The Court indicated that the essential distinction between the indefinite middle two categories centers on the question as to whether the terms included in the document are definite or indefinite, which then informs the central question as to whether the parties intended to be bound and, thus, their mutual assent.  Under this framework of analysis, the Court finds the letter of intent to be enforcable due to the mutual assent of the parties, and the lease is not enforceable.

Following this line of reasoning, the Court noted that due to the absence of ambiguous terms in the letter of intent the trial judge need not entertain extrinsic evidence, especially if the evidence were to be of a self-serving nature, as in the present case.

The full opinion is available in PDF.