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. 

Ellicott Dredges, LLC v. Ananda Shipyard & Slipways LTD (Maryland U.S.D.C.)

Filed: September 14, 2018

Opinion by: Catherine C. Blake, United States District Judge 

Holding:                                                      

The United States District Court for the District of Maryland denied Defendant’s motion to dismiss for lack of personal jurisdiction, holding Defendant, Ananda Shipyard & Slipways LTD, subjected itself to the jurisdiction of the state of Maryland when it consented to a valid freely-negotiated forum-selection clause.

Facts:

On January 19, 2012 Ellicott Dredges, LLC (“Ellicott”) and Ananda Shipyard & Slipways LTD (“Ananda”) entered a Joint Venture Agreement to “build and sell dredges, ancillary crafts and accessories to the government of Bangladesh.” In addition, about one year later the parties signed a License Agreement through which Ellicott licensed some of its products to Ananda, complete with mutual non-compete clauses. This License Agreement also stated that all disputes arising under the agreement would be resolved by the federal district court in Baltimore, Maryland:

            

Notwithstanding what is provided elsewhere in the Contract, disputes regarding the license agreement…will be handled as provided below in this clause 7.6…[Ananda]…hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the (federal) courts of the State of Maryland and of the United States of America (located in the City of Baltimore) for any actions, suits or proceedings arising out of or relating to this clause of this agreement.

The parties’ Joint Venture was successful and, as a result, Ananda entered four different Purchase Orders, governed by the “laws of the State of Maryland.” Further, these Purchase Orders stated Ananda was to secure letters of credit from specific banks. Ellicott alleges that Ananda violated several provisions of these orders, including its obligation to acquire said letters of credit.

As a result of these breaches, in December 2014 the parties entered a Separation Agreement, formally titled, “Amendments to Deed of Agreement dated 19^th January, 2012 and License Agreement dated March 15, 2013.” By its own terms, the Separation Agreement was executed “to supplement and/or alter certain provisions of the [Joint Venture Agreement] and License Agreement in order to elucidate the extent and the ambit of relationship between the parties.” Among other things, the Separation Agreement removed the non-compete restrictions on Ellicott’s conduct. The Separation Agreement also stated that the Separation Agreement, “the [Joint Venture Agreement] and the License Agreement and all non-contractual obligations arising from or in connection with the same shall be governed and enforced in accordance with the governing law and enforcement provisions contained in Clause 7.6 of the License Agreement.” 

Despite these modifications, Ananda sent Ellicott a demand letter in December 2017 claiming Ellicott violated the non-competition provision of the License Agreement. One month later, Ellicott filed suit seeking a declaratory judgment on the parties’ rights and obligations under the Separation Agreement and claiming Ananda breached its obligations under the Joint Venture Agreement, Purchase orders, and License Agreement, as amended by the Separation Agreement.

Analysis:

The federal court had to determine several interrelated legal issues, including whether it had jurisdiction over the dispute, and whether the forum selection clause in incorporated into the Separation Agreement was constitutionally enforceable.  In evaluating the enforceability of this clause, the court had to decide what substantive contract law would apply using Maryland's choice-of-law rules.

(1)  Personal Jurisdiction Standard of Review

A court’s assertion of personal jurisdiction over a nonresident defendant must comply with two requirements: (1) the exercise of jurisdiction must be authorized under the state’s long-arm statute; and (2) the exercise of jurisdiction must comport with the due process requirements of the Fourteenth Amendment. Carefirst, 334 F.3d at 396.  For purposes of its analysis, the court concluded that Maryland’s long-arm statue is coextensive with the limits of the due process clause. Id.

The due process clause permits parties to waive their challenge to personal jurisdiction by “either implicitly or explicitly” consenting to the court’s jurisdiction. Foster v. Arletty 3 Sarl, 278 F.3d 409, 413 (4^th Cir. 2002). Further, a party may consent through a “valid forum selection clause,” which courts have held “is enough to confer personal jurisdiction on a nonresident defendant.” CoStar Realty Information, Inc. v. Field, 612 F. Supp. 2d 660, 668 (D. Md. 2009). Maryland has long enforced freely negotiated forum-selection clauses.

A federal court exercising diversity jurisdiction must apply the substantive law of the state in which it sits, including the state’s choice-of-law rules. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). Under Maryland law, if “the contract contains a choice of law provision,” the court must apply “the law of the specified jurisdiction.” Cunningham, 107 A.3d 1194, 1204 (Md. 2015).

Where a contract is silent as to the substantive law to be applied, a court applying Maryland's choice-of-law rules "[must] apply the law of the jurisdiction where the contract was made.” Id.  A contract is “made where the last act necessary to make the contract binding occurs.” Riesett v. W.B. Doner & Co., 293 F.3d 164, 173 n.5 (4^th Cir. 2002). The parties and circuit precedent agree that the last act necessary to make a contract binding is the final party’s signature. 

(2)  Personal Jurisdiction Standard of Review Applied to Ananda

The relevant contract for this Analysis is the Separation Agreement, which modified the License Agreement, and is therefore the most current expression of the parties’ relationship. The last act required to form the Separation Agreement, the final signature, occurred in Maryland when the agreement was signed by Ellicott’s representative and therefore Maryland law applies. And because the Separation Agreement selected this forum to resolve the parties’ disputes through its incorporation of clause 7.6 of the License Agreement Ananda consented to this court’s jurisdiction. 

Ananda has not claimed that the forum selection clause is invalid and unenforceable under Maryland law. Instead, Ananda argues that by its terms the clause only governs “actions…arising out of or relating to” the clause itself. In Ananda’s view, it only consented to the court’s jurisdiction for disputes over the scope of the clause. The court dismisses this argument, explaining, “If the forum selection clause only governs claims arising out of the forum selection clause then the parties agreed to have this court engage in a circular exercise: the court can decide whether it has jurisdiction to decide if it has jurisdiction and so on. That is an absurd reading, unsupported by common sense or the very clause Ananda attempts to interpret.” 

The court further highlights that what the parties intended by their forum selection clause is written right above its text: “notwithstanding what is provided elsewhere in the Contract, disputes regarding the license agreement or intellectual property or confidential data will be handled as provided below in this clause 7.6.” And further, Ananda consented to “irrevocably and unconditionally waive any objection to the laying of venue of any action, suit or proceeding arising out of this agreement or the transactions contemplated hereby.”

The full opinion is available in PDF.

Atlas Master Fund, LTD. v. Terraform Global Inc. (Cir. Ct. Mont. Co.)

Filed:  January 3, 2019

Opinion by:  Judge Rubin

Holding:  To determine whether a claim under the Securities Act of 1933 adequately alleged omissions from a registration statement, a court will review whether there is a substantial likelihood that the disclosure of the omitted information would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.

Facts:  A Delaware corporation (the “Company”) with its principal office in Bethesda, Maryland, was formerly controlled by its sponsor/parent (“Parent”) in a YieldCo structure.  A YieldCo is a tax-efficient financing structure that exists largely to benefit the sponsor, by allowing “the sponsor to tap the public equity markets without giving up control of the underlying assets.”  The Company completed an IPO on July 31, 2015 at $15.00 per share of common stock.  The Company’s stockholders were paid $5.10 per share when it was acquired by a third party in December 2017.  Plaintiffs are investment funds that bought shares in the IPO and brought suit alleging the loss in value in the span of two years, resulted in large measure, from material representations and omissions in the Company’s registration statement. 

The registration statement provided that any material transaction between the Company and Parent would require the approval by the Company’s conflicts committee, which was composed entirely of independent directors (the “Conflicts Committee”).  On November 20, 2015, the Company’s board allegedly terminated the two members of the Conflicts Committee following the Committee’s failure to approve a transaction requested by Parent.  Later the same day, three new members were added to the Company’s board and approved the transaction. 

The registration statement also provided an assurance that Parent, which borrowed money to purchase and develop the assets it sold to the Company, had adequate capital and access to the capital markets to make acquisitions and to develop projects.  Plaintiffs alleged the registration statement failed to disclose that, at the time of the IPO, Parent needed a $169 million loan to satisfy an undisclosed margin call related to an earlier acquisition by Parent.  While the loan closed after the IPO in August 2015, plaintiffs alleged the terms were known before the offering.  The interest rate exceeded the disclosed average annual interest rate by 500%. 

The defendants, which included the Company and persons who served as officers and directors of both the Company and Parent, filed a motion to dismiss arguing that the plaintiffs failed to plead viable claims for relief under the Securities Act of 1933.

Analysis:  With respect to alleged omissions from a registration statement, a court will review whether there is a “substantial likelihood that the disclosure of the omitted [information] would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”  Under circumstances where a registration statement contains both seemingly accurate and inaccurate information, “the Supreme Court has cautioned that ‘not every mixture with the true will neutralize the deceptive.  If it would take a financial analyst to spot the tension between the one and the other, whatever is misleading will remain materially so, and liability should follow.”

The Court found factual questions existed whether the registration statement was misleading with regard to each of the following aspects: (a) the Conflicts Committee, which was represented to be an effective control against self-dealing by Parent; (b) Parent’s then-existing financial condition and ability to raise capital to acquire and fund drop-down projects; and (c) Parent’s ability to disengage from the YieldCo model and decline to drop-down projects to the Company if Parent could get a better deal elsewhere. 

Conflicts Committee.  The Court stated that while the registration statement disclosed Parent’s ability to appoint all of the Company’s directors, including members of the Conflicts Committee, “a fair reading of the registration statement makes it seem that there would be a meaningful check in place to block overreaching by Parent regarding drop-downs.  No rational investor would equate the power to appoint [the Company’s] directors with the power to sack an independent Conflicts Committee, at will, and replace it with loyalists, the first time [the Company’s] Conflicts Committee rejected” a proposal. 

Parent’s Financial Condition.  The plaintiffs alleged that, although the loan closed in August 2015 after the IPO, the terms were known before the offering.  Plaintiffs conceded that the registration statement warned generally about the Company’s dependence upon Parent, and need for liquidity.  The Court stated that a registration statement may be misleading if “it fails entirely to disclose a material risk that is already known by the company” and concluded that it is a reasonable inference that certain defendants “knew of these impending, and imminent material financial events on July 31, 2015.”  The Court noted that the registration statement did not disclose the Parent’s need to secure the $169 million loan, which “likely would have alerted potential investors of material risks, otherwise unknown to the public.”  The Court disagreed with defendants’ contention that the Company had no duty to disclose any information about Parent’s financial condition, even if it knew about it, due to the YieldCo structure and the Company being completely controlled by Parent.

Ability to Disengage.  The Court recognized this part of plaintiffs claim as being more tenuous.  While the registration statement did not say that Parent could, at will, simply abandon the Company, “the offering documents did say that neither party was required to buy or sell any project, or to do so on any particular terms.”  Giving plaintiffs the benefit of all favorable inferences, the Court was disinclined to dismiss this part of the claim. 

The Court denied the motion to dismiss.  The Court also discussed the doctrine of class action tolling.  

The opinion is available in PDF.