Thursday, December 3, 2015

Md. Comm’r of Fin. Regulation v. Cashcall (Ct. of Special Appeals)

Filed: October 27, 2015

Opinion by: Krauser, C.J.


A company qualifies as a “credit services business” under the Maryland Credit Services Business Act only if the sole business activity is loan arrangement services and the business must directly receive compensation from a Maryland consumer.


Defendant is a California company that marketed consumer loans through online services. Defendant referred consumers to two federally insured out-of-state banks and assisted the clients complete the loan application. If a customer met the lending requirements, one bank would process the loan, less an origination fee paid to the Defendant. Under the contract between the bank, Defendant must repurchase the loan amount – including all servicing and processing fees – owed by the consumer after the loan was disbursed. Additionally, the interest rates of these loans exceeded the permissible rates under Maryland law.

The Maryland Commissioner of Financial Regulation received numerous consumer complaints from 2007 to 2009. The Commissioner initiated an action in 2009, charging that Defendant operated as a credit services business without a license in violation of the Maryland Credit Services Business Act (“MCSBA”).


The court observed that, pursuant to the MCSBA’s legislative history, any company that receives payment directly from a consumer for loan repayment is subject to regulation under the MCSBA.  Any attempt by a company that provides consumer lending services and receives payment would undercut the law in opposition to the legislative intent of the law. Thus, the state would apply a broad view to regulate companies that operate primarily to provide consumer loans.

To define the term, “credit services business,” the Court reviewed Gomez v. Jackson Hewitt, Inc., 427 Md. 128 (2012). In Gomez, the Court of Appeals determined that Jackson Hewitt, Inc. had not violated the MCSBA. Jackson Hewitt offered tax preparation services and provided refund assistance lending (“RAL”) to qualifying customers, but did not directly receive any compensation from the customer for the RAL services. The Gomez Court ruled that Jackson Hewitt did not fit the legal requirements for a credit services business.

The Court distinguished Defendant’s services from Gomez on two key issues. First, Defendant received compensation directly from the consumers. Each loan processed by either bank was subject to the same “origination fee” which was then rolled into the repacked loan bought by Defendant. Consumers paid Defendant for the borrowed amount plus this origination amount. The Court concluded that Defendant “by collecting the origination fee paid by the borrowing consumer, received ‘direct payment’ from the consumers and therefore was . . .  a ‘credit services business’ under the MCSBA.” In contrast, Jackson Hewitt did not have a set origination fee which consumers never directly paid to the company for the loan services.

Second, Defendant fell under MCSBA regulation because it operated primarily and wholly as a consumer lending service. Defendant assisted consumers to complete the loan application, referred the loan to a bank, and repurchased the debt. The Court explicitly stated Defendant’s “loan arrangement service was . . . the only service [Defendant] provided.” Jackson Hewitt, on the other hand, primarily provided tax preparation services and only a small fraction of the consumers received RAL.

The full opinion is available in PDF.  

Wednesday, December 2, 2015

Sutton v. FedFirst Financial Corporation (Ct. of Special Appeals)

Filed:  October 29, 2015

Opinion by:  Graeff, J.

Holdings:  (1) The common-law fiduciary duties of candor and maximization of shareholder value articulated in Shenker v. Laureate Education, Inc. did not apply to a merger where shareholders received a mix of cash and stock consideration because the merger did not result in a sale or change of control of the target company.  (2)  Shareholder’s appeal is not moot even though rescission of merger would be impracticable, because shareholder could obtain rescissory damages in lieu of actual rescission if he were to prevail on his claims.

Facts:  Plaintiff, a shareholder of FedFirst Financial Corporation, sought to enjoin a merger between FedFirst and CB Financial Services, Inc., alleging that FedFirst’s directors breached fiduciary duties owed to FedFirst’s shareholders and that CB Financial aided and abetted the alleged breaches.

FedFirst began to explore a possible business combination with CB Financial in January 2013.  During the course of negotiations with CB Financial, FedFirst’s financial advisors were unsuccessful in soliciting other offers.  On April 14, 2014, after receiving a fairness opinion from its financial advisors, the FedFirst board unanimously approved the merger agreement with CB Financial, which was executed and announced that day.

The merger agreement provided that FedFirst shareholders would receive either  cash or shares of CB Financial common stock in exchange for each FedFirst share, at their election, subject to the requirement that 65% of the total shares of FedFirst would be exchanged for CB Financial stock and 35% would be exchanged for cash.  The agreement prohibited FedFirst from soliciting other acquisition proposals, but did not preclude it from considering unsolicited offers, as long as they were “superior proposals.”  If FedFirst terminated the agreement before consummating the merger it would pay CB Financial a termination fee.

On April 21, 2014, Plaintiff filed a class action lawsuit in the Circuit Court for Baltimore City against FedFirst, its seven individual directors and CB Financial, asserting both direct and derivative claims.  He later voluntarily dismissed the derivative claims, and on September 19, 2014, the Circuit Court dismissed the remainder of his claims with prejudice.  Plaintiff promptly noted his appeal, but did not move to stay the merger pending appeal, and on October 31, 2014, FedFirst and CB Financial completed the merger.

Analysis:  Plaintiff argued that FedFirst’s directors had breached common-law fiduciary duties of candor and maximization of shareholder value, as articulated in Shenker,, which held that directors owed such duties to shareholders in “cash out” mergers that effectively eliminated their interest in the target company without providing any interest in the acquiring company.  Shenker also established an exception to the general rule that a shareholder may only challenge a merger transaction in a derivative action (i.e., on behalf of the corporation), holding that a shareholder may bring direct claims when “the occurrence of appropriate events” triggers the aforementioned common-law duties to shareholder individually.  Plaintiff argued that  Shenker’s holding was not limited to “cash out” transactions, but that other “appropriate events” could give rise to fiduciary duties of candor and maximization of value to shareholders.

The Court conducted a detailed analysis of Shenker and agreed that its holding was not limited to “cash out” transactions, but that fiduciary duties of candor and maximization value are owed to shareholders when “the decision is made to sell the corporation,” the “sale of the corporation is a foregone conclusion,” or the sale involves “an inevitable or highly likely change-of-control situation.”  While the Court of Appeals declined to explain what factual scenarios may satisfy these triggering events, the Court looked to Delaware case law, which recognizes duties to shareholders only in the following scenarios:

(1) when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company; (2) where, in response to a bidder’s offer, a target abandons its long-term strategy and seeks an alternative transaction involving the break-up of the company; or (3) when approval of a transaction results in a sale or change of control (internal quotations and citations omitted).

The Court found none of these scenarios present with respect to the FedFirst/CB Financial merger.  Plaintiff did not allege that FedFirst initiated an active bidding process or abandoned a long-term strategy to seek to break up the company. Rather, the FedFirst directors merely explored options for a potential merger, which they would then present to the stockholders for approval.  The facts did not indicate that the sale of the company was a foregone conclusion. And, perhaps most importantly, the Court found that the mixed cash and stock consideration did not result in a sale or change of control of the company, noting that, “Unlike the scenario involved in the cash-out merger transaction in  Shenker, FedFirst’s shareholders in this case, by virtue of the stock portion of the merger agreement, have a continuing interest, including voting power, in the combined company, and they can participate in the future successes of CB Financial.”

For these reasons, the Court found that the duties articulated in Shenker did not apply, , that FedFirst’s directors were subject only to the ordinary managerial duties set forth in C.A. § 2-405.1 and were protected by the business judgment rule, and that Plaintiff had no basis for his direct claims against FedFirst and its directors.  The Court also dismissed Plaintiff’s aiding and abetting claims against CB Financial because it had found no underlying breach of fiduciary duties.

While the Court ultimately affirmed dismissal of Plaintiff’s claims on the merits, it rejected Defendants’ threshold argument that Plaintiff’s claims were moot because he sought to prevent a merger that had been completed while the appeal was pending.  The Court recognized that unwinding a long-completed merger involving more than two million publicly traded shares and an integration of corporate management would not be practicable, but found that the possibility of rescissory damages (i.e., the fair value of Plaintiff’s shares) had Plaintiff prevailed on the merits of his claims precluded a finding of mootness.

The full opinion is available in PDF.