Opinion by: James K. Bredar
Holding: Where (1) a principal exerts control over a
corporation’s board via a majority acting within the principal’s scope of
employment, (2) the board takes actions in breach of contract and in
contravention of principal’s express statements, and (3) sufficient privity
exists to survive a challenge based on economic loss doctrine, well-pleaded
allegations of fraudulent misrepresentation against the principal are
sufficient to survive a motion to dismiss for failure to state a claim.
Facts: Plaintiffs (“Owners”) are members of master and subordinate
property owners’ associations in a mixed residential and commercial
development. Defendant (“Developer”) is
the developer of the relevant properties.
Development began in 2005, and Developer incorporated master
and subordinate owners’ associations one year later. Soon thereafter, Developer caused its
employees to occupy the initial positions on both associations’ boards. Developer filed on behalf of each association
similar covenants under which a management company would maintain common areas,
with Developer to pay costs until such time as it transferred title to the
common area property to the associations.
Developer began billing Owners in 2008 but did not transfer title to the
common areas until December 2015.
Owners, as members of the master and subordinate associations, brought separate but practically identical actions alleging breach of contract, negligent misrepresentation, and fraudulent misrepresentation. Developer removed both actions under diversity jurisdiction and moved to dismiss the tort claims for failure to state a claim. Removal was granted, and both actions were joined for convenience and efficiency.
Owners, as members of the master and subordinate associations, brought separate but practically identical actions alleging breach of contract, negligent misrepresentation, and fraudulent misrepresentation. Developer removed both actions under diversity jurisdiction and moved to dismiss the tort claims for failure to state a claim. Removal was granted, and both actions were joined for convenience and efficiency.
Analysis: Developer first argued that Owners’ allegations sounded only
in contract. The court began by noting
that under the doctrine of respondeat
superior, because Developer’s employees joined the boards under its
direction and in furtherance of its objectives, Developer would be vicariously
liable for any tortious acts committed by the board. By extension, because board members of
Maryland non-stock corporations owe the same fiduciary obligations as any other
Maryland corporation, breach of duty accompanying a contractual obligation
would be sufficient to support a tort claim.
So finding, the court permitted Owners’ tort claims.
Developer next argued that the economic loss doctrine barred any
tort claims, such that its alleged negligence causing purely economic harms
ought not create tort liability in the absence of privity, actual physical
injury, or risk thereof. However, noting
that Maryland has traditionally permitted tort actions for purely economic
losses in the context of fraud, and finding more than sufficient allegation of
privity between the parties via the intimate nexus between Owners and the
associations, and Developer’s control of the boards, the court deemed risk of
tort liability reasonably foreseeable.
Third, Developer argued that Owners’ reliance on Developer’s allegedly negligent or fraudulent statements was unreasonable. Avoiding the factual question of whether reliance was reasonable, the court evaluated the board’s alleged conduct under the adverse domination doctrine, where knowledge or actions of an agent whose interests are adverse to the principal cannot be imputed to the principal. Because corporate entities act through agents who wouldn’t rationally be expected to communicate their own wrongdoing to the principal, equitable considerations lean in favor of the corporation and create a rebuttable presumption. Here, a cause of action against the board (and vicariously, Developer) would not accrue if a disinterested majority board could be proven. In the court’s view, Developer had not alleged sufficient facts to show that the boards contained a disinterested majority during the time period at issue.
Lastly, Developer argued that Owners’ claims failed to meet FRCP Rule 9(b)’s particularity requirements that time, place, and contents of allegedly fraudulent statements and the person making such statements be pled with sufficiency. Finding the complaint to contain sufficiently complete allegations (an accounting of dated bills approved by the boards while under Developer’s control, with identities of the board members responsible), the court found Owners to have met their Rule 9(b) burden.
Third, Developer argued that Owners’ reliance on Developer’s allegedly negligent or fraudulent statements was unreasonable. Avoiding the factual question of whether reliance was reasonable, the court evaluated the board’s alleged conduct under the adverse domination doctrine, where knowledge or actions of an agent whose interests are adverse to the principal cannot be imputed to the principal. Because corporate entities act through agents who wouldn’t rationally be expected to communicate their own wrongdoing to the principal, equitable considerations lean in favor of the corporation and create a rebuttable presumption. Here, a cause of action against the board (and vicariously, Developer) would not accrue if a disinterested majority board could be proven. In the court’s view, Developer had not alleged sufficient facts to show that the boards contained a disinterested majority during the time period at issue.
Lastly, Developer argued that Owners’ claims failed to meet FRCP Rule 9(b)’s particularity requirements that time, place, and contents of allegedly fraudulent statements and the person making such statements be pled with sufficiency. Finding the complaint to contain sufficiently complete allegations (an accounting of dated bills approved by the boards while under Developer’s control, with identities of the board members responsible), the court found Owners to have met their Rule 9(b) burden.
Accordingly, the court found Owners to have survived Developer’s
motions to dismiss.
The full opinion is available in PDF.
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