RCPR Acquisition Holdings, LLC v. Zurich American Insurance Company (Cir. Ct. Mont. Co.)

Filed: June 5, 2019

Opinion by: Judge Anne K. Albright

Facts: The defendant, an insurance company, allegedly failed to satisfy its contractual obligation to indemnify the plaintiff for property damage, business interruption, and other losses sustained as a result of Hurricane Maria. The plaintiff sought declaratory relief under §§ 3-406 and 3-1701(d) of the Courts and Judicial Proceedings ("CJP") Article, alleging that the defendant was both obligated to indemnify the plaintiff for the full amount of its losses and the defendant failed to act in good faith by refusing to pay coverage. The defendant then filed a motion to bifurcate.

Analysis: Sections 3-1701(d) and (e) of the CJP Article provide that coverage and bad faith are to be heard in an action and by a trier of fact. Specifically, § 13-1701(e) provides that ". . . Notwithstanding any other provision of law, if the trier of fact in an action under this section finds in favor of the insured and finds that the insurer failed to act in good faith, the insured may recover from the insurer . . . [actual and other damages]." Pointing to appellate Maryland precedence, the court determined that the trier of fact in an action meant one jury, not two, and an award of actual (and other damages) for bad faith could only follow from a finding of coverage and bad faith by that one trier of fact. As such, the need for one trier of fact complicated the defendant's request for bifurcation. The court noted that if the plaintiff prevailed on its claims, the jury would have to return to court in the future to hear the other claims after discovery. While such an arrangement is possible in theory, it is also inconvenient. The court acknowledged the prejudice the defendant may face by having to defend all claims concurrently, but found that the defendant did little to show why options less onerous than bifurcation, i.e. jury instructions and a special verdict sheet, would not ameliorate said prejudice. Further, even if § 3-1701 permitted bifurcation with two juries, the overlap in the plaintiff's three claims was too substantial to conclude that bifurcation would promote convenience.  Presumably, collateral estoppel might reduce some of this duplication, but identifying the factual issues to which collateral estoppel might apply was not a straightforward analysis. Therefore, bifurcation was not appropriate.

The full opinion is available in PDF.

Under Armour, Inc. v. Battle Fashions, Inc. (Maryland U.S.D.C.)

Filed: July 18, 2019

Opinion by: Richard D. Bennett

Summary: Under Armour, Inc. (“Under Armour”) filed a lawsuit seeking, among other things, a declaration that its use of certain phrases in connection with its products does not infringe upon a registered trademark owned by defendant Kelsey Battle (“Battle”).  Battle, a resident of North Carolina, moved to dismiss the action for lack of personal jurisdiction.  After holding an evidentiary hearing, the court dismissed the action for lack of personal jurisdiction and transferred the matter to the Eastern District of North Carolina.

Analysis:  The court initially denied Battle’s motion to dismiss, holding that the requisite preliminary prima facie showing of personal jurisdiction had been made.  However, after holding a pre-trial evidentiary hearing, the court found that personal jurisdiction over Battle had not been established by the requisite preponderance of the evidence.  The court began its analysis of personal jurisdiction by noting that two conditions must be satisfied in order to exercise personal jurisdiction over a non-resident: (1) the exercise of jurisdiction must be authorized under Maryland’s long-arm statute [Md. Code Ann., Cts. & Jud. Procs. § 6-103(b)]; and (2) the exercise of jurisdiction must comport with the due process requirements of the Fourteenth Amendment of the Constitution.  As to that two-pronged analysis, the court noted that Maryland courts “have consistently held that the state’s long-arm statute is coextensive with the limits of personal jurisdiction set out by the Due Process Clause of the Constitution,” but that courts must address both prongs of the analyses.

As to the first prong of the analysis, the court noted that “a plaintiff must specifically identify a provision in the Maryland long-arm statute that authorizes jurisdiction”.  Here, Under Armour argued the existence of personal jurisdiction over Battle based on his transacting business in Maryland [Md. Code Ann., Cts. & Jud. Procs. § 6-103(b)(1)].  Noting that “Maryland courts have construed the phrase ‘transacting business’ narrowly, requiring, for example, significant negotiations or intentional advertising and selling in the forum state”, the court found that a small number of sales by Battle to Maryland consumers, two cease and desist letters sent by Battle to Under Armour in Maryland, and three letters sent by Battle to parties outside of Maryland in order to “put pressure” on Under Armour were insufficient to establish personal jurisdiction under Maryland’s long-arm statute.

As to the second prong of the personal jurisdiction analysis, the court noted that the Fourteenth Amendment requires that a defendant have certain minimum contacts with the jurisdiction “such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.”  Acknowledging that there was no basis to assert “general” or “all-purpose” jurisdiction over Battle, the court focused its analysis on “specific” jurisdiction, which requires that the action “arise out of or relate to the defendant’s contracts with the forum.”  Here, the controversy did not relate to marketing or selling infringing products in the forum but instead related to the activities of Battle in enforcing his trademark.  Accordingly, the court’s analysis focused on whether the two cease and desist letters sent to Maryland and the three letters sent to parties outside of Maryland were sufficient to establish specific jurisdiction over Battle in Maryland.  As to the letters sent to Under Armour in Maryland, the court held that “cease-and-desist letters alone are insufficient to confer specific personal jurisdiction.”  The court then noted that “enforcement activities taking place outside the forum state do not give rise to personal jurisdiction in the forum.”  Based on that premise, the court held that the three letters sent to parties outside of Maryland did not give rise to personal jurisdiction over Battle because those letters “did not threaten litigation, had no effect on Under Armour’s business, and did not result in any damage to Under Armour’s business relationships.”

The full opinion is available in PDF.

Steele v. Diamond Farm Homes Corp. (Ct. of Appeals)

Filed: June 26, 2019

Opinion by: Judge Michele D. Hotten

Holding: The Court of Appeals held that a homeowner's assertion of an offset against a homeowner's association's ("Association") claim for nonpayment of dues was rooted in the premise that the Association lacked the power or capacity to raise assessment dues in a manner that conflicted with an express provision in the Association’s Declaration of Covenants, Conditions and Restrictions. The Court held that the assertion the Association lacked power or capacity fell under the guidelines for bringing ultra vires claims pursuant to Md. Code Ann., Corps. & Ass'ns § 1-403. Because the statute has specific criteria for bringing ultra vires claims that the homeowner failed to observe, the Court held that Petitioner’s defense of an offset was precluded.

Facts: The Petitioner owned a home in the Diamond Farm development of Montgomery County, which was managed by a homeowners association (“Association”). In accordance with the Association’s Declaration of Covenants, Conditions and Restrictions (“Declaration”), the Association must obtain at least two-thirds of the total votes of all classes of members voting in person or by proxy to increase annual assessments. Through a letter, the Petitioner discovered that assessment increases in 2007, 2011, and 2014 did not receive the requisite two-thirds vote for approval. As a result, the Petitioner calculated her over-payment in assessment dues, determined that she was entitled to an offset, and ceased making payments. The Association noted the Petitioner's payment delinquency in October 2016 and brought suit against her regarding the unpaid assessments and attorney’s fees. Thereafter, the District Court entered judgment in the Petitioner's favor because the Association had failed to establish the amount of dues owed. The Association subsequently noted a de novo appeal to the Circuit Court for Montgomery County, which ruled in favor of the Association. The Petitioner appealed and the Court of Appeals granted certiorari. The Court reviewed whether the Petitioner's defense for non-payment of dues was invalid due to a statute restricting the use of the ultra vires defense or laches. [The court's consideration of of attorney's fees and the doctrine of equitable estoppel is omitted.]

Analysis: The Court analyzed the ultra vires statute, Md. Code Ann., Corps. & Ass’ns. § 1-403. Ultra vires acts are those that exceed the express or implied powers of a corporation, and shareholders may challenge ultra vires acts to preclude corporations' unchecked powers. Section 1-403 specifies that: "(a) Unless a lack of power or capacity is asserted in a proceeding described in this section, an act of a corporation or a transfer of real or personal property by or to the corporation is not invalid or unenforceable solely because the corporation lacked the power or capacity to take the action . . . (b)(1) Lack of corporate power or capacity may be asserted by a stockholder in a proceeding to enjoin the corporation from doing an act or from transferring or acquiring real or personal property." The plain language of the statute required the Petitioner to raise an argument regarding lack of power or capacity “in a proceeding to enjoin the corporation,” which she failed to do so.

After noting the Association as a corporation, the Court analyzed the situations in which a corporation’s actions are considered ultra vires and whether the Association’s declaration operated as a document establishing a corporation’s power and capacity, such that exceeding the scope of a declaration constitutes an ultra vires action. The Court referenced the Court of Special Appeals precedence explaining that “[a]n ultra vires act ‘is one not within the express or implied powers of the corporation as fixed by its charter, the statutes, or the common law.’” So far, Maryland case law has not considered whether a declaration can operate as one of the documents under which a corporation can exceed its powers.

Thus, the Court next considered the functionality of the Association’s declaration. The Court found that the Association’s declaration prescribed its capacity and certain powers—the central concern regarding whether to apply the ultra vires statute. The Court also considered the Association’s articles of incorporation, which is synonymous with a charter and is subject to the ultra vires statute. The Association’s articles of incorporation specified that: “The purpose[] for which the corporation is formed [is] . . . [t]o enforce any and all covenants, restrictions and agreements[.]” Those covenants, restrictions and agreements were explicitly outlined in the Association’s declaration, such that the declaration operated as a key governing document outlining the Association’s powers and capacity.

After its review of the declaration of the Association and its interaction with the Association’s articles of incorporation, the Court was persuaded that both documents prescribed the parameters of the Association’s authority and power. Therefore, the Petitioner's argument had to follow the procedural guidelines specified in the ultra vires statute. Here, the ultra vires statute did not provide the Petitioner with a defense under the circumstances because she did not first pursue a derivative action, and the court found she may not defend on the basis of the ultra vires statute.

The full opinion is available in PDF.

ConAgra Foods RDM v. Comptroller

ConAgra Foods RDM v. Comptroller (Ct. of Special Appeals)

Filed: June 27, 2019

Opinion by: Judges Woodward, Arthur and Leahy

Holding:

Foreign intellectual property holding company subsidiaries of corporations doing business in Maryland have no economic substance and are taxable separately from the parent.

Facts:

ConAgra is a processed food conglomerate that sold products in Maryland from 1996 through 2003, filed tax returns in Maryland and paid income tax.  One of its subsidiaries, Brands, was formed for the sole purpose of serving as an intellectual property holding company.  Brands licensed the trademarks to ConAgra and received royalties, and paid royalties back to the parent.

In 2007, the Comptroller of Maryland issued a Notice and Demand to File Maryland Corporation Income Tax Returns for 1996 through 2003 as well as a Notice of Assessment totaling $2,768,588 in back taxes, interest and penalties.  The Maryland Tax Court upheld the Comptroller’s assessment because Brands lacked “economic substance” as a separate business entity, which satisfied the U.S. Constitution requirements of “minimum contacts” and “nexus”. 

Analysis:

To meet U.S. Constitutional standards, the government’s tax collection procedures must provide taxpayers with “fair warning” to satisfy the Due Process Clause of the U.S. Constitution.  Under the Mobil Oil standard there must be a minimal connection between the interstate activities and the taxing State, and a rational relationship between the income attributed to the State and the intrastate values of the enterprise.  Mobil Oil Corp. v. Comm’r of Taxes of Vermont, 445 U.S. 425 (1980).  The Commerce Clause is designed to prevent States from engaging in economic discrimination, and requires that a tax (1) apply to an activity with a substantial nexus with the taxing State, (2) be fairly apportioned, (3) not discriminate against interstate commerce, and (4) be fairly related to the services the State provides.  Philadelphia v. New Jersey, 437 U.S. 617.

These criteria have been implemented by the Court of Special Appeals in several cases, and the Court agreed with the Maryland Tax Court in this case after reviewing the standards from Gore Enter. Holdings, Inc. v. Comptroller, 437 Md. 492 (2013) and Comptroller v. SYL, Inc., 375 Md. 78 (2003) as well as Comptroller v. Armco Exp. Sales Corp., 82 Md. App. 429 (1990).  In Gore, Gore assigned all of its patents and certain other assets to the wholly owned subsidiary in exchange for the subsidiary’s entire stock.  The four factors in Gore that helped the Court determine if the wholly owned foreign subsidiary lacked economic substance and was consequently subject to income tax in Maryland were:  1. How dependent the subsidiary is on the parent for its income; 2. Whether there is a circular flow of money between the two companies; 3. How much the subsidiary relies on the parent for its core functions and services;  4. Whether the subsidiary engages in substantive activity that is in any meaningful way separate from the parent.  Also, in SYL, the Court of Appeals adopted the Armco reasoning and found that sheltering income from state taxation was the predominant reason for the creation of SYL.

Here, Brands was dependent on ConAgra for the “vast majority” of its income, there was a circular flow of money between the companies, Brands relied on the parent for its core functions, and it did not have any meaningful substantive activity separate from ConAgra.

Separately, the Court also approved the State’s blended apportionment formula to determine Brands’ taxable income as an altered formula is permitted by Tax General Article 10-402(d) to clearly reflect income.  Here, the popular 3-factor apportionment formula based on property, payroll and sales would have yielded an apportionment factor of zero.  The blended formula accounted for ConAgra taking deductions for the royalty expenses.

The full opinion is available PDF.

Mas Associates, LLC, et al. v. Harry S. Korotki (Ct. of Appeals)

Filed: August 8, 2019

Opinion by: J. Adkins

Holding: The evidence cannot sustain the simultaneous intent to form both an LLC and a partnership where the parties engaged in negotiations to become members of an existing LLC and never abandoned that intention; they governed the entity and made capital contributions to it consistent with the terms of the existing LLC operating agreement; and in the interim period before becoming members, they agreed to be employees rather than partners, and treated payments made to them as salary rather than shared profits.

Facts:

In 2009, Appellee and two defendants, one of whom was a member of the Appellant LLC, began discussing the possibility of merging their companies to increase profitability. The parties held discussions about what form the merger would take and eventually agreed to dissolve the other companies and join the Appellant LLC.

The parties agreed during a business planning meeting that the parties should own Appellant LLC at approximately a third each (plus a minority) and, to achieve this, planned a transfer of interests under the Appellant LLC's existing 2004 operating agreement. They also agreed during the meeting to divide their affairs into an interim and post-interim period. During the interim period, the parties agreed that they would be employees who would receive compensation equal to one-third of the profits. Appellee and the non-owner defendant would also liquidate their companies and surrender their licenses. The parties' attorneys circulated a draft interim agreement and a draft operating agreement, which were extensively negotiated but never signed. For years, the parties engaged in the business and eventually began turning a profit. Other relevant details are discussed in the analysis section.

In 2011, Appellee resigned from his position and attempted to negotiate his departure. The defendants refused to meet with him, and Appellee filed a claim in the Circuit Court for Baltimore County. Among other claims, he pleaded for a determination of the buyout price of his partnership interest. The trial court found in favor of Appellee on all but one of his claims. The trial court found that a partnership had existed because the parties made management decisions together and contributed money equally during the course of the business and awarded damages accordingly. The question presented here is whether competent material evidence exists in the record to support the trial court’s conclusion that the parties intended to form a partnership.

Analysis:

In Ramone v. Lang, No. Civ.A. 1592-N, 2006 WL 905347 (Del. Ch. Apr. 3, 2006), the Ramone court held that there was no partnership between two parties who had discussed buying a swimming center by forming an LLC. When negotiations failed, and one party went on to form an LLC with other individuals, the other party claimed they had formed a partnership in the course of their negotiations. The Ramone court held that the failure to form an LLC without more did not make them partners given the reality that they had never agreed on their obligations to one another.

The Court also cited other case law and sources for the proposition that “it would be inequitable to construe arms-length negotiations between sophisticated parties to form an LLC concurrently as intent to form a partnership when those negotiations fail.” See Grunstein v. Silva, C.A. No. 3932-VCN, 2011 WL 378782 (Del. Ch. Jan. 31, 2011); Christine Hurt, D. Gordon Smith, Alan R. Bromberg & Larry E. Ribstein, on Partnership sec. 204[B]; and Garner v. Garner, 31 Md. App. 641 (1976). The Court concluded that these principles are applicable here.

Here, the parties’ initial goal, which remained consistent throughout the negotiations, was to each obtain a membership interest in the Appellant LLC. To govern their relations until they could reach that goal, the parties entered an interim agreement whereby they would be employees and not partners. Critically, the parties never abandoned their efforts to become members of the Appellant LLC.

As for other factors that courts commonly look toward to evaluate partnership intent, the Court also found in favor of the Appellants. In terms of the management and control factor, the Court held that the parties were acting in accordance with the terms of the existing 2004 operating agreement and that their joint decision-making is consistent with the typical duties of an LLC manager. Also, casual use of the word “partner” is not determinative, particularly when the parties did business under the registered tradename of the Appellant LLC.

As for the capital contributions factor, the parties made payments first to another member of the Appellant LLC who then transferred them to the Appellant LLC because such was the procedure demanded under the existing 2004 operating agreement. Such elaborate steps would have been unnecessary if the parties intended to contribute to a partnership. Finally, the Revised Uniform Partnership Act prohibits blurring the lines between partnerships and other entities. To treat the contribution to an LLC as a contribution to a partnership would be to treat the entities as one in the same in contravention of the express terms of the law.

As for the sharing of profits and losses factor, the Court cited Ingram v. Deere, 288 S.W.3d 898-99 in support of the contention that salary can be a share of gross revenue. Here, the payments to the parties were denoted as salary on the payroll journal, their wages were calculated on W-2 forms--which included typical wage withholdings--they reported wages on their Form 1040 tax returns, and no one filed a K-1 schedule reporting profits. The business paperwork also reflected their titles as managers and officers. Also, Appellee never intended to be equally liable for the debts of the alleged partnership, as evidenced by his unwillingness to be held jointly and severally liable for loans or execute any indemnity agreements to that effect.

As a result, the Court of Appeals reversed the lower court, determining that the trial court was clearly erroneous in finding an intention to form a partnership by the parties to the litigation.

The full opinion is available in PDF.

Gables Construction v. Red Coats

Gables Construction v. Red Coats (Ct. of Special Appeals)

Filed: February 27, 2019

Opinion by: Judge Alexander Wright.

Holding:

Contractual waivers of subrogation do not shield a contracting party from third-party contribution and direct liability under the Maryland’s Uniform Contribution Among Joint Tort-Feasors Act (“UCATA”)

Facts:

Upper Rock was the owner of a residential building project and hired Plaintiff Gables Construction (“GCI”) as the General Contractor, wholly owned by Gables Residential Services, Inc. (“GRSI”), to build the building. GSRI hired Defendant Red Coats, Inc./Admiral (“Red Coats”) to provide security and fire watch services monitoring during the construction period from approximately 5 pm to 6 am pursuant to a vendor services agreement (the “VSA”).  In the GSRI-Red Coats VSA, Red Coats waived subrogation; also, GCI is named as an additional insured in the VSA.

A fire damaged a building as it was almost completed.  The fire may have been caused by space heaters.  Upper Rock sued Defendant, and they settled.  Defendant then sued Plaintiff, claiming it was liable because it provided no training on the operation of the space heaters to Defendant.

Analysis:

The Court of Special Appeals agreed with the Montgomery County Circuit Court that Red Coats’ settlement with Upper Rock does not preclude Red Coats from seeking contribution from GCI under Maryland’s UCATA.

Citing Homeseekers’ Realty v. Silent Automatic Sales, 163 Md. 541, 545 (1933), a “contract is binding only upon the parties to the contract and their privies.”  

Before Maryland enacted its UCATA in 1941, “a statutory right of contribution among joint tortfeasors….did not exist.”  See Central GMC v. Helms, 303 Md. 266, 276(1985).  Thus, injured parties cherry-picked which tortfeasor to sue.

UCATA provides that a release of one joint tortfeasor does not relieve the liability of other joint tortfeasors.  If it did, it could create a chilling effect on business relationships.

The full opinion is available PDF.

Smith v. Wakefield, LP (Ct. of Appeals)

Filed:  February 27, 2019

Opinion by:  Judge Robert N. McDonald

Holding:  Action for back rent under a residential lease is subject to a three-year statute of limitations irrespective of whether the parties purport to convert the lease into a contract under seal.  The three-year statute of limitations governing residential leases is not subject to waiver.

Facts:  

Petitioner (“Tenant”) in 2007 entered into a month-to-month lease for an apartment in Baltimore City owned by respondent (“Landlord”).  The lease consisted of a one-page cover page and seven pages comprising 90 numbered terms and conditions.  Among those provisions was the following sentence: 

STATUTE OF LIMITATIONS: This lease is under seal and is subject to the twelve-year limitation period of Section 5-102 of the Courts and Judicial Proceedings Article of the Annotated Code of Maryland.

Tenant vacated after a few months and ceased to pay rent though the parties dispute whether Tenant vacated voluntarily after giving notice or had been evicted.

Nearly eight years later, Landlord sued Tenant to recover unpaid rent, arguing that CJ §5-101’s three-year period of limitations did not apply to a “contract under seal.”  The District Court of Baltimore City agreed and found in Landlord’s favor.  On appeal, the Circuit Court for Baltimore City affirmed.  Tenant thereafter petitioned for and was granted certiorari.

Analysis:

First, the Court set out the two relevant statutes prescribing statutes of limitation for civil actions: CJ § 5-101 providing the three-year limit for the majority of civil actions and CJ § 5-102 outlining the twelve-year limit for “specialities” such as instruments under seal, bonds, or judgments.

In Tipton v. Partner’s Management Co., the Maryland Court of Appeals had evaluated the merits of a similar action; there, a landlord had sued to collect back rent after failing to take legal action for seven years.  The Tipton Court exhaustively researched the legislative history of CJ § 5-101 and CJ § 5-102, determining that Maryland had applied the three-year period of limitations since colonial times, even though leases and conveyances of real property had customarily been executed “under seal.”  Maryland’s legislature had seen fit not to place residential leases among the “specialties” carved out from the general three-year limit when it revised the code and created CJ § 5-101.   Tipton held that a mere seal affixed to a lease would not waive the three-year period of limitations.  The Tipton Court, however, did not reach the threshold questions of the instant case: would a clear and explicit waiver of the three-year statutory period of limitations conflict with Maryland landlord-tenant law?

Landlord argued that Tipton’s holding left room for parties to agree to modify the limitation period.  The Court responded shrewdly: had anything changed so markedly in the five decades since the last code revision that supported quadrupling the period of limitations on an action for back rent to 12 years?  The 1970s legislature not only revised the Courts and Judicial Proceedings articles, but also the Real Property articles (e.g. attempting to eliminate the custom of executing leases under seal) and Landlord-Tenant law (e.g. attempting to neutralize the superior bargaining power of landlords).   Landlord’s last bastion was an attempt to point to more recent developments.

So looking, the Court turned its focus to Ceccone v. Carroll Home Services, LLC, decided in 2017.  The Ceccone Court held that parties could modify a statute of limitations that might otherwise apply to a cause of action provided that (1) there existed no controlling statute to the contrary, (2) the modification was reasonable, and (3) the modification was not subject to other defenses such as fraud, duress, or misrepresentation.  Finding some ambiguity in the application of the first element to RP § 8-208(d)(2)’s requirement that a lease be proscribed from waiving or foregoing any right or remedy provided by applicable law, the Court found more clarity in element two.  Ceccone’s framework for evaluating the reasonableness of a modification included the following factors: the length of the modified period of limitations, its relation to the statutory period, the relative bargaining power of the parties, the subject-matter of the contract, and whether the modification was one-sided in its effect.  

Applying this framework, the Court found the factors to lean in Tenant’s favor.  Government agencies would not have retained records for so long as twelve years, the lease terms and format argued against an arms-length bargaining process, and the Court could find no potential action that a tenant might reasonably bring under a lease a decade or more after its termination making the waiver one-sided in its application.  In the Court’s view, a nine-year extension of the time to bring an action for back rent did not constitute a reasonable modification of the statute of limitations.

The Court therefore found the three-year period of limitations (1) to apply to actions for back rent under residential leases regardless of language purporting to convert the lease to a contract under seal, and (2) not subject to waiver.

Two judges wrote in dissent, noting that the Maryland legislature in 2014 excepted from the twelve-year period of limitations certain instruments such as deeds of trust, mortgage, and promissory notes signed under seal, but did not include residential leases in that legislation.  Bills in 2016 and 2017 to craft such an exception failed, indicating legislative intent to militate precisely against the court’s majority reasoning.

The dissent further noted that statutes of limitation operate as procedural mechanisms rather than rights or remedies, meaning RP § 8-208(d)(2) should not limit a lease’s modification of the three-year general statute of limitations.

The full opinion is available in PDF.

Capital Finance, LLC v. Rosenberg (Maryland U.S.D.C.)

Filed:  January 23, 2019

Opinion by:  Richard D. Bennett

Holding:  The word “and” in a “bad boy” guaranty agreement may require a disjunctive reading of the provision due to the character of the contract when the language is unambiguous and when a conjunctive reading would render the guaranty meaningless, even if a conjunctive reading of the provision is theoretically possible.

Facts:  On July 1, 2015, a lender (the “Lender”) entered into a Credit and Security Agreement and a Note with a group of skilled nursing facilities and long term hospitals (the “Borrower”) controlled by two individuals (the “Guarantors”) who personally guaranteed the financing.  As a condition precedent to the financing, a Guarantor submitted Borrowing Base Certificates that warranted the facilities had paid all payroll taxes.  The Credit Agreement required the Borrower to deposit proceeds into bank accounts by a Deposit Account Control Agreement (the “DACA”).  The Guarantors executed “bad boy” guaranties, “which required them to satisfy all outstanding obligations” upon the Borrower’s commission of fraud or illegal acts. 

The Borrower failed to pay payroll taxes, triggering the guaranties.  The Borrowing Base Certificates falsely represented that Borrower had paid these taxes.  Between December 2016 and January 2017 the terms of the Credit Agreement were further violated when payments were diverted from DACA-controlled accounts to an account that was not controlled by the Lender.  

Section 1(d) of the guaranties provided the following: 

Notwithstanding any provision herein to the contrary, Agent acknowledges that this Guaranty and the Guaranteed Obligations hereby shall only be applicable and enforceable against the Guarantor in the event that: (a) Borrower colludes with other creditors in causing an involuntary bankruptcy or insolvency proceeding involving any of the Credit Parties in an effort to circumvent, avoid or impair the rights of Agent or the Lenders, (b) a voluntary bankruptcy filing by Borrower to the extent that a court of appropriate jurisdiction determines that such filing was made otherwise than in accordance with applicable law, and (c) any act of fraud or other illegal action taken by Borrower or any Credit Party in connection with the Credit Agreement or any other Financing Document.  [emphasis added]

On June 8, 2018, the Lender demanded payment from the Guarantors under the guaranties.  The defendants argued that all three events listed in Section 1(d) of the guaranties must have occurred to trigger liability pursuant to the guaranties. 

Analysis:  “To prevail on a claim for breach of contract under Maryland law, a party must prove the existence of a contractual obligation, a material breach of that contractual obligation, and resulting damages.”  A court does not need to consult extrinsic evidence when a contract is unambiguous.  Maryland law, as provided in Bankers & Shippers Ins. Co. v. Urie, recognizes that the word “and” may require a “disjunctive reading in light of the character of the contract.”  After finding that Section 1(d) of the guaranties is not ambiguous, the court stated that the guaranties would be rendered meaningless if the defendants’ argument held.  “A bad boy guaranty which remains unenforceable until Borrower engages in an implausible triad of egregious conduct, any one of which would seriously inhibit the lender’s access to collateral, does not provide this sort of incentive – it is not a guaranty at all.”  While the defendants’ interpretation of the guaranties is possible – a single entity may undergo voluntary and involuntary bankruptcy proceedings – it is not the reading of a reasonable person. The court found that each of (i) failing to pay payroll taxes and (ii) submitting false Borrowing Base Certificates constituted fraud and provided a base for liability under the guaranties.  

The court also stated that the “No Waiver” section of the Credit Agreement and the “Guaranty Absolute” provision of the guaranties precluded “affirmative defenses of equitable estoppel, waiver, release, and laches.”

The full opinion is available here in PDF.  

Stone v. Wells Fargo Bank, N.A. (Maryland U.S.D.C.)

Filed January 17, 2019

Opinion by Judge Ellen L. Hollander

Holding: An arbitration agreement between a bank customer and the bank was enforceable because  the arbitration provision was broad and sufficiently related to the dispute between the parties.

Facts:

Plaintiff Meghan Stone (“Stone”) alleged that Wells Fargo Bank (the “Bank”) improperly took funds from her account, in violation of the terms of her service agreement (the “Agreement”) with the Bank.  The service agreement contained an arbitration provision requiring arbitration for any “dispute”  that could not be resolved informally. The Agreement defined “dispute” as “any unresolved disagreement” between the parties that relates “in any way to services, accounts or matters; to [Stone’s] use of any of the Bank’s banking locations or facilities; or to any means [she] may use to access [her] accounts.” The Agreement also incorporated the American Arbitration Association Rules (the “AAA Rules”), which state that “the arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement or to the arbitrability of any claim.”

In December 2014, Stone discovered that the Bank had removed approximately $45,000 from her accounts with the Bank and denied her use of her secure line of credit.  After she informed the Bank of its error, the Bank refused to return the funds and instead, suspecting identity fraud, investigated Stone’s account, resulting in fifteen felony counts and two misdemeanor counts relating to theft, fraud, and identity theft levied against Stone until they were dismissed in February 2015. 

Stone sued the Bank, alleging its employees improperly used and took her money and then negligently initiated the identity fraud investigation against her.  Her charges against the Bank included negligence, respondeat superior, and malicious prosecution (the “Charges”).  The Bank filed a Motion to Compel Arbitration and Dismiss the Action (the “Motion”), claiming the Agreement’s arbitration provision applied to the dispute with Stone.  Stone filed an opposition to the Motion, arguing the Charges were not governed by the Agreement because the Bank’s actions did not “relate or have anything to do with [her] accounts with [the Bank].”  The Bank replied, requesting either an AAA arbitrator to determine the scope of the arbitration provision, or the Court to hold Stone’s Charges arbitrable.

Analysis:

The Court first determined whether an arbitrator or the Court itself should decide whether the Charges were arbitrable.  Citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995), the Court emphasized that courts should not assume the parties agreed to “arbitrate arbitrability” without “clear and unmistakable” evidence that they intended to arbitrate the scope of an arbitration agreement.  While in some circuits, incorporating the AAA Rules into an agreement provides “clear and unmistakable” evidence, in the Fourth Circuit it remains an open question as to whether an unsophisticated party like Stone can provide clear and unmistakable evidence simply by incorporating the AAA Rules.  Given the Bank’s status as a Fortune 500 company and the fact that Stone, as a consumer, most likely did not intend for the incorporation of the AAA rules to demonstrate her desire for arbitration, the Court determined that the Court itself, and not an arbitrator, should determine whether the Charges were arbitrable. 

The Court then analyzed whether the Charges were subject to arbitration by first determining whether the parties had voluntarily agreed to arbitration, and then what subject matter the parties agreed was subject to the arbitration provision.  In this case, there was no dispute that there was a written arbitration agreement between the parties.  The Court then proceeded to consider whether the claims made by Stone were within the scope of that agreement, stating that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.” In this case, the Court analyzed the language of the arbitration clause itself and categorized it as a "broad" provision.  This, coupled with the strong public policy of federal courts in favor of arbitration, required Stone to provide  "positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute."

The Court concluded that the arbitration provision relates to (i) the negligence charge because it concerns the Bank’s services; (ii) the respondeat superior charge because it is directly related to the negligence charge, which is covered by the arbitration clause; and (iii) the malicious prosecution charge because there is a “significant relationship” between the events underlying the malicious prosecution charge and Stone’s use of the Bank’s services and accounts.  Thus, the Court granted the Bank’s Motion to Compel Arbitration on all of Stone's claims.

The full opinion is available in PDF.

Payments IP Pty Ltd. v. B52 Media LLC (Maryland U.S.D.C.)

Filed: February 23, 2018

Opinion by: Ellen Lipton Hollander

Facts: Payments IP Pty Ltd. (“Payments IP”), an Australian company, allegedly contracted with B52 Media, LLC (“B52”), a Maryland limited liability company, and Maryland resident Lonnie Borck (“Borck”), B52’s owner (Borck and B52 being referred to collectively, as the “B52 Parties”), to purchase a web domain (the “Domain”).  Later that year, Payments IP allegedly discovered that the Domain had been placed on an “administrative freeze” by the domain registrar because the Domain was the subject of a lawsuit pending in California state court. In the California state case, an individual resident of California, Suraj Kumar Rajwani (“Rajwani”), asserted ownership of the Domain (the “California Case”).  Payments IP successfully intervened in the California Case.  Shortly after Payments IP moved to intervene in the California Case, Payments IP filed suit in the United States District Court for the District of Maryland (the “Maryland Case”), asserting claims similar to those asserted by Payments IP in the California Case, including a claim for declaratory judgment regarding ownership of the Domain.  Motions were filed by the defendants in the Maryland Case seeking to dismiss the declaratory judgment claim against Rajwani for lack of jurisdiction and to stay the Maryland Case for so long as the California court retained jurisdiction over the California Case. 

Analysis/Holding:  The Maryland Court first addressed Rajwani’s motion to dismiss for lack of jurisdiction, pursuant to which Rajwani argued that the Court lacked both personal jurisdiction over him and in rem jurisdiction over the Domain.  As to personal jurisdiction, the Court noted that “to assert personal jurisdiction over a nonresident defendant, two conditions must be satisfied: (1) the exercise of jurisdiction must be authorized under the state’s long-arm statute [Md. Code Ann., Cts. & Jud. Procs. § 6-103(b)]; and (2) the exercise of jurisdiction must comport with the due process requirements of the Fourteenth Amendment.”  Regarding the interaction between those two conditions, the Court noted that “the reach of the long arm statute is coextensive with the limits of personal jurisdiction delineated under the due process clause of the Federal Constitution, [and thus] our statutory inquiry merges with our constitutional examination.”  The Court ultimately denied Rajwani’s motion to dismiss for lack of personal jurisdiction, holding that, based on the pleadings and papers filed in the Maryland Case, Payments IP made a prima facie showing of personal jurisdiction because:

 (i) over the course of seven years, Rajwani engaged in extensive negotiations with the B52 Parties (who were domiciled in Maryland) with respect to the Domain;

(ii) Rajwani transferred money to B52 on four occasions, totaling approximately $600,000;

(iii) Rajwani visited Maryland on one occasion in 2015 to meet with Borck in connection with the negotiations over the Domain dispute; and

(iv) Rajwani filed a claim with the Register of Wills in Maryland against the estate of Borck predicated on the underlying transaction involving the Domain. 

However, in light of the procedural posture of the Maryland Case (i.e., early in the proceedings, without having conducted any discovery or any evidentiary hearing on the issue of personal jurisdiction), the Court held that Payments IP must ultimately prove the existence of personal jurisdiction by a preponderance of the evidence.

The Court then addressed Rajwani’s request that the Court abstain from jurisdiction under the so-called “Brillhart/Wilton” doctrine, which allows federal district courts to decline jurisdiction over declaratory judgment actions in certain circumstances; namely, if abstention would save judicial resources.  The Court denied Rajwani’s request because Rajwani sought non-declaratory relief that was so closely related to his declaratory judgment claim that abstaining from jurisdiction as to that claim would not save any judicial resources.

Next, the Court addressed Rajwani’s request for dismissal based on the so-called “Princess Lida” doctrine, which provides that “a federal court may not exercise jurisdiction when granting the relief sought would require the court to control a particular property or res over which another court already has jurisdiction.”  According to Rajwani, the Maryland Case was subject to dismissal because the declaratory judgment claim was an in rem proceeding vis-à-vis the Domain, which was already subject to the in rem or quasi in rem jurisdiction of the California court in the quiet title action.  In the Maryland Case, Payments IP sought declaratory relief against, not only Rajwani and the B52 Parties but also, “all other claimants, known and unknown”; the Court reasoned that, because it did not possess personal jurisdiction over “all other” possible claimants, it must, therefore, obtain in rem jurisdiction over the Domain in order to grant the relief sought by Payments IP.  Based on the fact that the California court had exercised jurisdiction over the Domain prior to the filing of the Maryland Case, and the fact that no one disputed the California court’s jurisdiction, the Court held that, pursuant to the Princess Lida doctrine, the Court did not have in rem jurisdiction over the Domain.  However, rather than dismissing the claim as requested by Rajwani, the Court stayed the claim, because, according to the Court, “the Princess Lida doctrine is one of abstention, rather than subject matter jurisdiction….  Thus, if the Princess Lida doctrine is implicated, this Court should dismiss or stay the declaratory judgment claim, but it does not lack subject matter jurisdiction.”

Lastly, the Court addressed the motions of Rajwani and the B52 Parties to stay the Maryland Case, pending resolution of the California Case, on the basis of so-called “Colorado River” abstention, which provides that a federal district court may, in “exceptional circumstances,” stay federal litigation that is parallel to a state suit.  Specifically, if there exists parallel litigation involving substantially the same parties and substantially the same issues (such that the state action will resolve every claim at issue in the federal action), then a stay of the federal case may be appropriate based upon a balancing of the following six factors:

“(1) whether the subject matter of the litigation involves property where the first court may assume in rem jurisdiction to the exclusion of others;

(2) whether the federal forum is an inconvenient one;

(3) the desirability of avoiding piecemeal litigation;

(4) the relevant order in which the courts obtained jurisdiction and the progress achieved in each action;

(5) whether state law or federal law provides the rule of decision on the merits; and

(6) the adequacy of the state proceeding to protect the parties’ rights.” 

Applying that analysis, the Court first held that the Maryland Case and the California Case were parallel actions because:

(a) the parties were the same in both actions;

(b) both actions concerned the same basic issue (ownership of the Domain) and transactions (the contract to buy the Domain); and

(c) the relief sought by Payments IP in the Maryland Case was “virtually identical to the relief Payments IP seeks as an intervenor in the California case.” 

The Court then held that a stay of the Maryland Case was appropriate based on a balancing of the aforesaid factors because:

(1) the California court had assumed in rem jurisdiction over the Domain (weighing in favor of abstention);

(2) the California and Maryland courts were equally convenient to Payments IP  and any minimal convenience difference as between the other parties was mitigated by the fact that, if the Maryland Case were not stayed, the parties would likely be required to litigate in both forums (either neutral or weighing in favor of abstention);

(3) it was desirable to avoid piecemeal litigation (weighing in favor of abstention);

(4) the California court obtained jurisdiction before the Maryland Court and significantly more progress had been made in the California Case than in the Maryland Case (weighing in favor of abstention);

(5) jurisdiction of the Maryland Case was based on diversity of the parties and there were no federal questions at issue (either neutral or weighing in favor of abstention); and

(6) the California Case was adequate to protect the rights of Payments IP, as evidenced by Payments IP’s decision to intervene in that action before filing the Maryland Case, as well as the progress made in that action (either neutral or weighing in favor of abstention).

The full opinion is available in PDF.

Telos Corp. v. Hamot (Ct. of Special Appeals, Unreported)

Filed: November 27, 2018

Opinion by: Judge Matthew Fader

Holding: Although there is evidence from which a trial court could infer damages from expert testimony with reasonable certainty despite a plaintiff's failure to offer such proof, it is not required to draw such inferences as it is the plaintiff's burden to carry.

Facts:  The defendants in this suit were two holders of preferred stock (the "Stockholders") of Telos Corporation ("Telos").  The terms of the preferred stock entitled holders to semi-annual dividends and, in 2005, redemption of the shares in five annual increments.  If Telos failed to pay the dividends three consecutive times, the holders of the preferred stock were entitled to elect two directors to the board.  The Stockholders were elected as such directors due to Telos' continued nonpayment of the dividends.  Telos claimed that it could not pay the dividends or redeem the preferred stock as anticipated because, per the terms of the preferred stock, Telos was required to satisfy other debt obligations designated as a higher priority.  Through their investment hedge fund, the Stockholders filed suit in Virginia against Telos’ auditor, Goodman & Company, LLC ("Goodman"), claiming that Telos' obligations to pay dividends and ultimately redeem the preferred stock should be treated as current liabilities of Telos; however, Telos and Goodman believed that these should not be treated as current liabilities given the terms of the preferred stock.  Given the litigation in Virginia and the Stockholders' recent election to Telos’ board of directors, Goodman resigned as Telos’ auditor.

Telos retained another auditor, The Reznick Group, P.C. ("Reznick").  Shortly thereafter, the Stockholders began copying Reznick on letters the Stockholders were sending to Telos and Goodman that contained multiple demands and accusations.  Ultimately, Reznick interpreted the communications as a threat of litigation if it did not adopt the Stockholders’ view regarding the financials.  Reznick believed this compromised its independence; therefore, although the 2007 audit was reportedly almost complete, Reznick resigned as Telos’ auditor effective April 2008.  Telos retained another auditor, BDO Seidman, LLP ("BDO").  BDO had to conduct its own audit, which had to be performed on a tight deadline; therefore, BDO had to use more resources than it ordinarily would and, as a result, the audit fees were higher. 

The Stockholders filed a lawsuit in Maryland against Telos seeking access to certain books and records.  Telos filed a countersuit for, among other things, tortious interference with Telos' relations with Goodman and Reznick.  The trial court found that the Stockholders had engaged in such tortious interference and awarded Telos damages equal to the amount of fees paid to Reznick for the 2007 audit, fees incurred by Telos in connection therewith, and fees Telos had to pay Goodman for reissuing earlier audit opinions.  The trial court refused to award damages for the difference between the amount Telos paid BDO for its 2007 and subsequent audits and what Telos would have paid if the Stockholders had not tortuously interfered with the contractual relationships.  

At trial, Telos presented expert testimony regarding the excess audit fees incurred because of the Stockholders' actions (i.e., the difference between the amount Telos normally would have paid for an audit and the amount Telos actually paid for the audits).  The court did not find the expert’s methodology to be a reliable proxy for what Goodman's audit fees may have been had Goodman finished the audit and therefore, although the court agreed there were damages for excess audit fees, the amount could not be determined.

Analysis: The Court of Special Appeals agreed with the trial court that Telos had not presented sufficient evidence to enable the trial court to calculate the excess audit fees.  Telos' argument focused almost exclusively on the expert's methodology for estimating what Goodman’s fees would have been compared to what BDO's fees actually were.  Although Telos argued at trial that excess audit fees could be determined using the Reznick fee instead of the projected Goodman fees, Telos did not present evidence for how the court should determine what Reznick's final fee would have been.  The Court of Special Appeals rejected Telos' argument that the trial court should have gone through the record and determined its own methodology because Telos, as plaintiff, had the burden of proving the damages with reasonable certainty, which it failed to do.  It distinguished this case from other cases Telos tried to use to support its claim because, in those cases, the trial court failed to consider or give proper credit to a party’s damage claim whereas in this case the trial court merely declined to develop its own methodology for calculating damages or determining what Reznick's final fee may have been.

This is an unreported opinion.  See Md. Rule 1-104.


Full text of the opinion available here.

Penchuk v. Grant (Cir. Ct. Mont. Co.)

Opinion by: J. Anne Albright 

Holding:

Shareholders’ ratification of a board’s merger decision is valid where the shareholders were informed of the deal provisions at issue, and where the Plaintiff failed to explain how disclosing certain pieces of financial information would have altered the “total mix” of information available to shareholders.

Facts:

Plaintiff Walter Penchuk is a common stockholder of CYS Investments, Inc., a Maryland publicly-traded corporation that invests in residential mortgage pass-through certifications (the "Corporation"). In June 2018, the Corporation announced a proposed merger with Two Harbors Corporation, a real estate investment trust and also a publicly-traded Maryland corporation (the "REIT"). The Corporation and the REIT filed a joint proxy statement and two supplementary Form 8-Ks. In July, on the recommendation of the Board and by a majority vote of the shareholders of Corporation, the merger was consummated, and the Corporation became a wholly owned subsidiary of the REIT.

The Corporation's board had formed a special committee comprised of several of its directors to evaluate the merger proposals  — five bids in total, including the REIT's. As they narrowed down the bids to that of REIT, they negotiated the following conditions with REIT: an exclusivity period in exchange for three director appointments; that the transaction be taxable to the Corporation's shareholders; a non-solicitation provision; access to nonpublic information about competing proposals; a right to amend or match the offer; and a $43.2 million dollar termination fee.

Plaintiff filed a class action lawsuit against the Corporation (later dropped) and eight of its Directors (collectively, the "Defendants"), claiming a breach of fiduciary duty. The Plaintiff argued that these provisions amounted to onerous deal protections and a conflict of interest for the directors, and yielded inadequate consideration for the transaction, especially when considered in light of the Corporation's past financial performance. 

Defendants filed a motion to dismiss, and Plaintiff filed a second amended complaint, claiming failure to disclose one pro forma projection and two distributable cash flow projections, thus preventing the shareholders from making an informed decision about the merger. In their motion to dismiss, Defendants claimed, first, that venue is improper under the Corporation's amended bylaws and, second, that the business judgment rule protects their decision, as does the subsequent ratification of their decision by a majority of the shareholders.

Analysis:

First, Defendants argued that the Corporation's bylaws were amended to limit venue to Baltimore courts. The Court held that the amendment was invalid, citing Maryland Code Ann. Corps & Ass'ns section 2–110(a), which provides that a Corporation may not enact a provision that is inconsistent with Maryland law. Under Maryland law, a claimant may bring a claim against non-resident defendants in any county in Maryland. Md. Cts. & Jud. Proc. section 6–202(11).  Here, Defendants are non-Maryland residents, and its bylaws are inconsistent with the venue statute.  Defendants had argued that a change in the Corporations & Associations article permitted limiting shareholder claims to a particular venue in Maryland, but the Court's review of Maryland Corporations & Associations Article section 2-113 concluded that the statute permitted limitation on jurisdiction to a particular court system, but not as to venue of a specific court location within a jurisdiction.  The Court concluded that the legislative history for the section did not support an interpretation of it as permitting a limitation on venue.

Next, a shareholder's a valid claim for breach of fiduciary duty is extinguished when a majority of informed, disinterested shareholders vote to ratify a merger. In support, the Court cited long-held Maryland case law and Corwyn v. KKR Financial Holdings LLC, 125 A.3d (2015), which emphasized the requirement of “fully informed, uncoerced votes”. Maryland applies a materiality standard to disclosures to shareholders in advance of a merger (as does Delaware, and as is used in federal securities laws). A fact is considered a material only if there is a substantial likelihood that its disclosure would be viewed by a reasonable investor as significantly altering the total mix of information; for example, facts that would affect decisions to buy, sell or hold a company’s securities or affect a company‘s value. The burden is on a plaintiff to meet the materiality standard and explain how the facts at issue would have affected the total mix. Here, Plaintiff failed to meet the burden. First, the “onerous deal protections“ were disclosed to the shareholders. Second, as for the projections that were not disclosed, Plaintiff failed to specify how they would have significantly altered the total mix. Mere conclusory allegations are insufficient.

The Court therefore denied the Defendants' motion to change the venue, but granted its motion to dismiss with prejudice Count I of the Plaintiff's Complaint.

A pdf of the opinion is available here.

Mt. Hawley Ins. Co. v. Adell Plastics, Inc. (Maryland U.S.D.C.)

Filed:  December 3, 2018

Opinion by:  James K. Bredar

Holding:  The United States District Court for the District of Maryland (1) granted a motion for partial reconsideration to modify an interlocutory judgment and (2) denied motion for summary judgment due to genuine disputes of fact surrounding a claim for lack of good faith.

Facts: 

Defendant (“Manufacturer”) ran a business with several buildings covered by a commercial insurance policy maintained by Plaintiff (“Insurer”).  In late 2016, fire destroyed several buildings at Manufacturer’s Baltimore facility. 

Insurer sued in early 2017 seeking a declaration that the contract did not cover Manufacturer’s losses resulting from fire.  A period of significant discovery precipitated cross-motions for summary judgment; the United States District Court of Maryland denied Manufacturer’s motion in full and Insurer’s in part.  Insurer subsequently filed motions to partially reconsider and again for summary judgment, instituting the present proceeding before the same adjudicator.

Analysis: 

First, the court approached the threshold matter of the partial motion to reconsider.  Below, the court had ruled on Manufacturer’s claim that Insurer had lacked good faith in carrying out its investigation when the court denied summary judgment.  Insurer now posited that the court had failed to rule on whether Insurer had demonstrated good faith in carrying out its investigation.  Concurring with Insurer, the court agreed to modify its interlocutory judgment below and grant the motion to reconsider.

Having successfully landed its first punch, Insurer next needed to execute a haymaker: establish the absence of any genuine dispute of material fact as to both elements of a lack of good faith claim.  In order to prevail in summary judgment, Insurer would have to demonstrate that based on the developed record, no dispute of any material fact existed and that Insurer was entitled to judgment as a matter of law on the good faith claim.  "Good faith" is defined by Maryland statute "as an informed judgment based on honesty and diligence supported by evidence the insurer knew or should have known at the time the insurer made a decision on a claim." Md. Cts. & Jud. Proc. Code § 3-1701(a)(4).  The court found that few cases explained this definition of good faith, but that Maryland case law tended to take a totality-of-the-circumstances approach looking at what the insurer did to resolve the coverage dispute, the substance of the coverage dispute, and the insurer's diligence.

Returning to the factual record established below, the court found an abundance of evidence establishing a genuine dispute over both elements.  Insurer had pointed to its claim professional’s declarations and correspondence in denying the insurance claim.  Manufacturer had supported its assertions of bad faith with deposition testimony.  The record supported a genuine dispute as to why Insurer had stopped covering Manufacturer’s losses after attempts at subrogation had failed.

Finding genuine dispute of material fact as to both elements of the lack of good faith claim, the court denied motion for summary judgment.

The full opinion is available in PDF.

Al-Sabah v. Agbodjogbe (Maryland U.S.D.C.)

Filed:  January 14, 2019

Opinion by:  Ellen L. Hollander

Holding:  Motions for summary judgment (1) granted in part as to breach of contract claim where no genuine dispute of material fact existed as to the formation of a contract for a loan and its subsequent default, and (2) denied in part as to a claim for fraudulent misrepresentation where genuine dispute of material fact existed as to the requisite scienter.

Facts: 

Plaintiff (“Donor”) is a Kuwaiti citizen who met Defendant (“Entrepreneur”) in 2014 in Baltimore.  Entrepreneur operated a few restaurants and convinced Donor to invest in his business and to entrust him with the creation of investment entities and charitable endeavors on her behalf.  Donor thereafter transferred more than $3 million for these purposes.

Instead, Entrepreneur allegedly formed entities with himself as sole owner through which he purchased commercial property.  Entrepreneur also, allegedly without authorization, purchased a $470,000 family home in cash using the proceeds of a 2015 wire transfer from Donor. 

Donor became suspicious of Entrepreneur in early 2016 and demanded documentation relating to the business and charitable entities and their transactions.  These requests were met with delays and misrepresentations.  Three months later, Entrepreneur’s wife contacted Donor claiming that a loan taken out against the family home was in default and would result in the family’s eviction if $350,000 were not paid by the end of the week.  Donor phoned Entrepreneur requesting more details.  Entrepreneur responded indicating the amount needed was only $165,000 by the next Friday or he risked eviction. 

In fact, Entrepreneur’s pending obligation was less than $10,000, paid weekly toward a personal loan and bearing no collateral relationship to the family home.

Against her better judgment, Donor provided $150,000 in the form of an interest-free one-year loan.  Entrepreneur defaulted on the loan and Donor filed suit alleging claims of (1) fraudulent misrepresentation, (2) conversion, (3) conspiracy, (4) detrimental reliance, (5) unjust enrichment, (6) breach of contract, (7) breach of agency duties, and seeking damages and other equitable relief. 

After discovery, Donor moved for partial summary judgment on the fraudulent misrepresentation and breach of contract claims. 

Analysis: 

The court began with the breach of contract claim, requiring Donor not only to establish that Entrepreneur owed a contractual obligation and breached that obligation, but also that no genuine dispute of material fact existed in the matter. 

Entrepreneur contended that a genuine dispute of material fact existed due to the possibility that the money had not come from Donor but one of her charities.  The court, however, properly found Donor to have acted through her agent as a partially disclosed principal – an arrangement which did not undermine her claim for breach of contract.  The court also found compelling the evidence that Donor had personally reimbursed the charity for the cost of the loan and that her agent had disclaimed any personal interest in the sum. 

Accordingly, the court found no genuine dispute that the parties formed a contract which Entrepreneur breached by failing to repay the loan.

Moving next to the fraudulent misrepresentation claim, the court required Donor to show no genuine dispute of material fact existed that:

(1) Entrepreneur had made a false representation
(2) its falsity was known to Entrepreneur or made with reckless indifference to its truth
(3) the misrepresentation was made for the purpose of defrauding Donor
(4) Donor relied on the misrepresentation and had the right to do so
(5) Donor suffered compensable injury from the misrepresentation. 

Evaluating the factual record, the court found no genuine dispute as to element 1 given that the actual amount owed was less than $10,000 and that Entrepreneur’s representation of needing $165,000 would have made the actual amount received, $150,000, insufficient to meet the purported obligation.

The court had more difficulty finding the necessary scienter requirement of element 2, refusing to impute deliberate intent to deceive from Entrepreneur’s failure or inability to explain why he thought eviction was imminent or why he needed such a large sum of money.  Faced with ambiguity and silence, the court determined a fact-finder more appropriate to determine the merits of Donor’s fraudulent misrepresentation claim.

The full opinion is available in PDF.

Garner v. ClaimAssist, LLC (Maryland U.S.D.C.)

Filed: August 9, 2018

Opinion by: Judge Hollander

Holding:  An entity seeking to collect a nondefaulted debt on behalf of another entity is not considered a debt collector as defined by the Fair Debt Collection Practices Act ("FDCPA").

Facts:  Plaintiff was injured in a car accident and received medical treatment for her injuries at a hospital ("Hospital"). Plaintiff retained a lawyer to pursue a tort case relating to the accident.

Hospital’s sole member (the "Member") hired defendant to identify and seek reimbursement from third-party payors in auto liability accounts. Member transferred these accounts before they were in default. Defendant would then reach out to the patient to determine the appropriate third-party payor.

Plaintiff’s medical account was transferred to defendant to identify the proper third-party payor. Defendant sent a letter to the attorney retained to notify the plaintiff of the unpaid medical bills and that a hospital lien had been filed and attached to any reimbursement of funds as a result of the accident.

Plaintiff’s medical bill related to the accident was $801.16. Plaintiff has medical insurance and U.S. Medicare. Plaintiff alleges that the Hospital should have received payment through her medical insurance. As of April 28, 2015, the Hospital has not processed the bill. Plaintiff alleges that the debt was therefore "plainly false, inaccurate, deceptive, and/or misleading."

The defendant moved for summary judgment arguing that they are not a debt collector under the FDCPA.

Analysis: The FDCPA was enacted to protect consumers from "false, deceptive, or misleading" debt collection practices. 15 U.S.C. § 1692(e). To establish a claim under the FDCPA, one must prove: “(1) the plaintiff has been the object of collection activity arising from consumer debt; (2) the defendant is a debt collector as defined by the FDCPA; and (3) the defendant has engaged in an act or omission prohibited by the FDCPA."

The FDCPA differentiates a debt collector from a creditor by looking at the status of the debt when assigned to the entity. The status of the entity will change depending on whether the debt was or was not in default when acquired by the entity.

The FDCPA defines a debt collector as

any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.

15 U.S.C. § 1692a(6).

The FDCPA excludes as a debt collector "any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another . . . which was not in default at the time it was obtained." 15 U.S.C. § 1692a(6)(F)

The FDCPA defines a creditor as:

any person who offers or extends credit creating a debt or to whom a debt is owed, but such term does not include any person to the extent that he receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another.

15 U.S.C. § 1692a(4).

Courts have included within the term creditor, and not debt collector, entities collecting debts assigned to them before default. The intention was to exclude loan servicers of debt that was not in default to be included as a debt collector under the FDCPA.

There is no dispute of material fact of whether the account was in default when the Member transferred the account to defendant. Plaintiff failed to present any evidence showing the account was in default. Further, defendant was seeking to collect the debt of another, the Member. Defendant, therefore, falls under the 15 U.S.C. § 1692a(6)(F) debt collector exclusion reserved for an entity collecting nondefaulted debt of another.

Therefore, the Court granted the Summary Judgment Motion as to plaintiff’s FDCPA Claims.

The full opinion is available in PDF.