Wednesday, October 31, 2018

Thomas v. Cameron Mericle, P.A. (Cir. Ct. Mont. Cnty)

Filed: October 4, 2018

Opinion by: Anne K. Albright

Facts: The following facts are as alleged by the plaintiffs in their complaint and recited in the Circuit Court’s decision.  Two homeowners’ associations (HOAs), through two law firms, separately sought to recover HOA dues from two individuals.  With respect to one individual, suit had been filed in a District Court of Maryland to recover the dues.  The law firm in that action threatened to move forward with trial unless the individual signed a confessed judgment promissory note to settle the matter.  The individual signed the note and made all the payments due under the note; however, the law firm confessed judgment against the individual and filed a complaint for judgment by confession in the District Court.  With respect to the other individual, the law firm threatened to file suit unless the individual signed a confessed judgment promissory note to settle the matter.  The individual signed the note and began making the payments due under the note; however, the law firm confessed judgment against the individual and filed a complaint for judgment by confession in the District Court of Maryland.  In both instances, the confessed judgment note included a clause that appointed an attorney on behalf of the individual, who had authority, without any prior notice to or approval from the individual, to file for entry of a confessed judgment against the individual, in a way that waived the individual’s right to assert a legal defense to any action.  The law firms knew or had reason to know that the HOA dues arose from a consumer transaction or debt.

Based on the facts set forth above, the two individuals filed suit against the law firms, asserting the following six claims: (1) violations of the Maryland Consumer Debt Collection Act (“MCDCA”); (2) negligent misrepresentation; (3) breach of contract; (4) fraud; (5) money had and received; and (6) declaratory judgment.  The plaintiffs subsequently abandoned the breach of contract claim.  The law firms moved to dismiss the five remaining claims for failure to state a claim upon which relief can be granted.  The law firms sought to have all of the claims dismissed with prejudice on the basis of res judicata, arguing that the individuals could have raised defenses to the confessed judgments with the filing of a timely motion in the District Court, and having failed to do so, the individuals were barred from bringing those claims in the Circuit Court action.  Alternatively, the law firms sought to have the claims dismissed on the basis of the facts plead and the merits of the claims.

Analysis/Holding:  The Circuit Court rejected the law firms’ res judicata argument, holding that, because the individuals’ claims were not mandatory counterclaims in the underlying confessed judgment proceedings before the District Court and were not litigated in those proceedings, the individuals were not precluded from asserting the claims in the Circuit Court.  The Court also noted that, even if they had wanted to, the individuals could not have asserted their claims in the confessed judgment proceedings because the claims were either equitable in nature or the amount in controversy exceeded $30,000, such that the claims fell outside the jurisdiction of the District Court.  

Next, the Court discussed the MCDCA claim (Count 1).  The Court noted that “[t]o prove an MCDCA violation, a plaintiff must prove that 1) defendant is a debt collector; 2) defendant’s conduct in attempting to collect a debt was prohibited by the MCDCA [(e.g., to claim, attempt, or threaten to enforce a right with knowledge that the right does not exist)]; and 3) the underlying debt is ‘consumer’ in nature.”  In seeking dismissal of the MCDCA claim, the law firms focused on the first and third elements listed above, arguing that because the debts arose out of confessed judgment promissory notes, which are settlements separate from the underlying consumer transaction, the law firms were not “debt collectors” seeking to collect “consumer” debt.  The Court rejected that argument, holding that “the Law Firms used Confessed Judgment Promissory Notes and then sought confessed judgments.  Because use of those notes and pursuit of those judgments are additional steps the Law Firms allegedly took in order to collect HOA dues, both steps are subject to the MCDCA.”  The Court ultimately dismissed the MCDCA claim on the basis that the plaintiffs failed to allege that the law firms had any actual or constructive knowledge of wrongful conduct, as required under the second element of the claim.  However, the dismissal was without prejudice and with leave to amend the complaint, with the Court noting that a viable MCDCA claim might be asserted if the law firms charged inappropriate “add-on” fees and costs, such as late charges, attorneys’ fees or default interest, with knowledge or reckless disregard of the fact that such add-on fees and costs were not properly chargeable.

The Court then dismissed the negligent misrepresentation claim (Count 2), with prejudice, holding that the plaintiffs failed to allege, and that the Court could not identify, a duty of care owed by the law firms to the individuals.  The Court next dismissed the fraud claim (Count 4) and the money had and received claim (Count 5) because the individuals failed to allege actual facts, rather than general allegations, in support of requisite elements of those claims.  Finally, the Court, having dismissed all of the other claims, held that there was no current actual controversy between the plaintiffs and the law firms, and dismissed the declaratory judgment claim (Count 6).

The full opinion is available in PDF.

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Tuesday, October 2, 2018

IES Commercial v. Manhattan Torcon A Joint Venture (Maryland U.S.D.C.)

Filed: September 26, 2018

Opinion by: Judge Bennett

Holding:  Subcontractor’s breach of contract claim fails under the “cardinal change” theory because the parties amended the contract and therefore Subcontractor was not “ordered” to perform additional work outside the scope of the original contract.

Facts:  The U.S. Government hired General Contractor to build a biological research facility for the Army at Fort Detrick.  General Contractor hired Subcontractor for the electrical work.  A fire destroyed the building after Subcontractor had performed 92.5% of the work.
General Contractor and Subcontractor agreed to a Fire Rider that amended the original contract.  The rider set forth new, additional terms and conditions.  The Subcontractor then performed fire mediation work pursuant to the rider.  However, because the General Contractor was not required under the Fire Rider to pay the Subcontractor until the insurer paid the General Contractor, the General Contractor refused to pay the Subcontractor for a portion of the additional work.  The Subcontractor sued for breach of contract under a cardinal change/quantum meruit and other theories. 

Analysis:  A “cardinal change” occurs in the context of a government contract “when the government demands a contractual alteration ‘so drastic that it effectively requires the contractor to perform duties materially different from those originally bargained for.’”  Hancock Electronics Corp. v. WMATA (4th Cir. 1996).  This theory developed when the government began issuing unilateral contract modifications without seeking the consent from subcontractors and without being in breach of contract.  Crown Coat Front Co. v. US (USSC 1967).  If the unilateral modification exceeds the scope of the contract’s changes clause, then a cardinal change has occurred.  AT&T Comms. v. Wiltel (Fed. Cir. 1993).  Accordingly, a change is cardinal when it cannot be said to have been within the contemplation of the parties when they entered into the contract.  When the government orders a modification that constitutes a cardinal change, the result is a material breach of the contract, which “has the effect of freeing the contractor of its obligations under the contract, including its obligations under the disputes clause.” JJK Grp. v. VW Int’l (D. Md. March 27, 2015).

Here, the Subcontractor asserted that the fire “changed the nature of the Project from new construction to a disaster recovery, restoration, and reconstruction Project,” fundamentally altering the work Subcontractor had contracted to perform for General Contractor under the Subcontract.  However, the parties amended the contract via the Fire Rider, so the government never took unilateral action in altering the contract.  Similarly, the fire itself cannot be considered a cardinal change, nor can the altered work be either.

The full opinion is available PDF.