Clark Office Building, LLC v. MCM Capital Partners, LLLP, et al. (Ct. of Special Appeals))

Filed: January 29, 2021.

Opinion: Deborah S. Eyler

Holdings:

(1)  Landlord cannot maintain unjust enrichment claim against an unauthorized occupant of the leased premises because landlord did not confer a benefit on the occupant, a required by Maryland law, and the occupant was not unjustly enriched where landlord had a valid contract claim against the tenant for rent during time occupant possessed the premises.

(2) Landlord could not recover against unauthorized occupants of premises because occupants either had oral subcontract with tenant or were trespassers and were thus not in privity with landlord.

Facts:

Clark Office Building, LLC (“Landlord”) leased office space to MCM Capital Partners, LLLP (“Tenant”) for a term of five years, from February 1, 2015 through January 31, 2020. Beginning on January 1, 2018, Tenant failed to pay its monthly rent under the Lease. Landlord did not immediately issue a notice of default to Tenant due to assurances from Tenant that it was working on paying rent.

Without Landlord’s knowledge, and in violation of lease provisions, Tenant allowed MCM Capital, LLC and Alta Realty Company, LLC (“Occupants”) to occupy a portion of the premises rent free. Occupants were in possession of a portion of the premises from January to March of 2018. Around March 23, 2018, Landlord discovered Occupants and contacted Tenant who notified Landlord that it was surrendering the premises.

Landlord sued Tenant for breach of contract to recover unpaid rent and obtained a judgment for unpaid rent from January 2018 through January 2019. Landlord also sued Occupants for unjust enrichment for the value of rent for January to March of 2018. The Circuit Court ruled that Landlord could not recover restitution for Occupant’s use of the premises because the lease between Landlord and Tenant covered the same subject matter. The Circuit Court further ruled that, even if that were not so, Occupants were subtenants and were not in privity with Landlord; therefore, they could not be liable to Clarke for damage for their use and occupancy of the premises. 

Analysis:

The Court of Special Appeals held that the Landlord could not seek restitution from the Occupants because Landlord’s contract with Tenants, on which judgment had already been obtained, covered the same subject as the unjust enrichment claim against Occupants and, additionally, that there was no privity between Landlord and Occupants to justify recovery of unpaid rent.

The bulk of the Court’s analysis focused on when a stranger to a contract who receives a benefit from a party’s performance on a contract with a third party may be liable for unjust enrichment to the extent of the benefit retained.  To prevail on an unjust enrichment claim, the plaintiff must show: (1) a benefit conferred upon the defendant by the plaintiff; (2) an appreciation or knowledge by the defendant of the benefit; and (3) the acceptance or retention by the defendant of the benefit under such circumstances as to make it inequitable for the defendant to retain the benefit without payment of its value.

The Court noted that it is “settled law in Maryland, and elsewhere, that a claim for unjust enrichment may not be brought where the subject matter of the claim is covered by an express contract between the parties.” Thus, even if the elements of unjust enrichment are met, a party is not liable for unjust enrichment where a contract covers the subject matter of the claim. While this statement is generally true, the court explained that it is an overly broad statement of the law. The Court held that this bar on an unjust enrichment claim only exists where the party to the contract is not prevented from recovering against the other party to the contract. Where there is nothing preventing such recovery, it would not be unjust for the stranger to retain the benefit without payment.

The Court found that the Landlord could not establish a claim for unjust enrichment because it did not confer a benefit onto the occupant. The landlord had already transferred the right of occupancy to the Tenant, and therefore Landlord could not have transferred any rights of possession to the Occupant. Indeed, only the Tenant can transfer the right of occupancy during the term of the lease, subject, of course, to the lease provisions. The Landlord did not exercise its right to possess the premises until after the Occupants had moved into, and subsequently vacated, the premises. As a result, the Landlord did not have the ability to confer the benefit of possession onto the Occupants because the Tenant had the sole right under the lease to possess the premises.

Even if the elements of unjust enrichment were met, the Landlord was nevertheless prevented from recovering because the evidence showed that the Occupants’ retention of the benefit was not unjust. As noted above, where valid contract covers the subject of a claim, a claim for restitution cannot stand. This remains true even where a benefit is conferred on a stranger to the actual contract. This rule, however, is contingent on the contracting party not being prevented from recovering against the other party to the contract, as noted above.

By way of example, the Court discussed Raymond, Colesar, Glaspy & Huss, P.C. v. Allied Capital Corp, 961 F.2d 486 (4^th Cir. 1992) (applying Virginia law). There, the defendant, an investment capital company, asked plaintiff to audit a company that defendant was looking to invest in, a company named CAR. CAR contracted with plaintiff to obtain the audit but went bankrupt prior to completion of the audit. The plaintiff sued defendant on a quasi-contract theory for payment for its services rendered to CAR. The Raymond court affirmed a judgment against the defendant and awarded plaintiff the cost of services rendered to CAR as damages.

The Court in this case viewed the Raymond decision as a prime example of where the original party to the contract was prevented from obtaining judgement against the other party to the contract – i.e. due to bankruptcy. The Court stated that where the insolvency of the original contracting party or some other statute prevents recovery, an unjust enrichment claim may be maintained against the stranger to a contract. The facts of this case, however, showed no such impediment. Indeed, the Landlord had already recovered against the Tenant for unpaid rent for the months the Occupants possessed the premises. In such a case, the retention of a benefit by the Occupant was not unjust, thus preventing the unjust enrichment claim.

Finally, the court affirmed the trial court’s alternative ruling that the landlord could not recover because it was not in privity with Occupants. The evidence showed that the Tenant and Occupants entered into an oral contract to sublease the property. Under Maryland Law, a sublessee is not in privity of estate or contract with the original lessor, and thus, there was no legal relationship between the Landlord and the Occupants to form a basis of recovery.

The full opinion is available in PDF

Impac Mortgage Holdings, Inc. v. Curtis J. Timm, et al. (Court of Appeals)

Filed: July 15, 2021

Opinion by: Judge J. McDonald

Holding:  The Court of Appeals held that a publicly-held Maryland corporation’s charter contained an ambiguous provision regarding a series of preferred stock.  The ambiguity was resolved by the contemporaneous and undisputed documentation of the corporation without resorting to construing the provision against the drafter, which, in any event, was the corporation. 

Facts:  Impac Mortgage Holdings, Inc. decided to raise capital by issuing a series of preferred stock, Series B.  A provision of Impac’s charter prohibited Impac from adversely changing the special rights and preferences of Series B stock without the approval of two-third of Series B shares.  Impac later issued a nearly identical series of preferred stock, Series C.  In 2009, Impac sought to buy back shares of both Series B and Series C at a severe discount and eliminate the special rights and privileges associated with those shares.  Owners of two-thirds of Series B and Series C, tallied together, approved the measure, however owners of less than two-thirds of Series B did so.  Impac believed that approval of two-thirds of the Series B and Series C shares tallied together, provided the requisite approval to buy back shares and eliminate the special rights and privileges associated with those shares.  Owners of Series B filed an action in the Circuit Court for Baltimore City seeking to restore the rights and preferences of Series B shares.  The Circuit Court found that the charter provision was ambiguous and that the extrinsic evidence and interpretive aids referenced did not resolve the ambiguity.  The charter provision was construed against the drafter, Impac.  On appeal, the Court of Specials Appeals found that the charter provision was unambiguous, but reached the same result. 

Analysis:  The Court of Appeals construed the charter provision under the “objective” approach to contract interpretation by reviewing the language within the four corners of the contract and assessing whether the charter provision is ambiguous.  The Court of Appeals agreed with the Circuit Court that the charter provision when read as a whole, was ambiguous.  Specifically, the first charter provision specifies that Series B shareholders must approve a proposed charter amendment by a two-thirds vote and implies that only the votes of Series B shares matter.  However, the charter provision also contained a parenthetical that introduced the idea of voting separately as a class with holders of other series of preferred stock which at the time included Series B and Series C stock.  Due to the ambiguity, the Court of Appeals could consider extrinsic evidence to illuminate the mutual intent of the parties.  The Court of Appeals also emphasized that the purchasers of the stock were not a party to the drafting of the charter, and thus “the reasonable expectations of the purchaser of the securities must be given effect.” Kaiser Aluminum Corp. v. Matheson, 681 A.2d 392, 395 (Del. 1996).  The Court of Appeals considered the Series B prospectus summary and the Impac April 2004 board resolution as material extrinsic evidence.  The Series B prospectus summary contained only one interpretation, that Impac could not amend its charter in such a way as to materially and adversely affect certain Series B rights and preferences unless, Impact obtained the votes of two-thirds of the outstanding shares of Series B.  This interpretation was consistent with Impac’s board resolution which did not provide that the votes of any shareholder other than those of Series B stock could be included in the tally of votes on charter amendments affecting Series B preferences.  The Series B prospectus summary was the only material extrinsic fact that the reasonable investor would understand the charter provision to mean.  The Series B prospectus summary leads to only one interpretation of the charter provision, Impac could not amend its charter in such a way as to materially and adversely affect certain Series B rights and preferences unless Impac had obtained the votes of two-thirds of the outstanding shares of Series B.  The Court of Appeals did no resort to construing the charter provision against the drafter, Impac, as the documents resolved the ambiguity.  If the Court of Appeals were to conclude that the extrinsic evidence did not resolve the ambiguity and resorted to construing the provision against the drafter, the result would be the same.  Since fewer than two-thirds of the Series B shareholders consented to the buy back shares and eliminating the special rights and privileges associated with those shares, the amendments were not validly adopted. 

The full opinion is available in PDF.

Travelocity.com v. Comptroller of Maryland (Ct. of Appeals)

 

Filed: April 30, 2021

Opinion by: Judge Michele D. Hotten 

Holding: 

Online travel companies that facilitate hotel room or car rental reservations were not liable for Maryland sales and use tax prior to the 2015 amendment to Md. Code § 11-102(a) of the Tax-General Article; that amendment specifically added such companies to § 11-102(a)’s statutory definition of “vendors” liable for sales tax.

Facts: 

Petitioner (“Business”) operated an online travel company that facilitated web-based transactions between customers and third-party airlines, hotels, and rental car agencies.  Business entered into contracts with the third-party providers whereby it gained access to their reservation systems and subsequently listed the available flights, rooms, and vehicles on its internet portal.  In real-time, Business would connect interested customers’ selected reservations to the third-party providers; if a specific transaction matched an interested customer with an availability, the customer received the reservation, the third-party provider received the booking, and Business handled the communications, payments, and cancellations.  Business marked up the base rates charged by the third-party providers in return for the service it provided.

In November 2011, Respondent (“Comptroller”) assessed Business based on an audit of its 2003-2011 operations (the “audit period”) for the difference in tax rates between that ordinarily paid by Business and that paid by the third-party providers.  Comptroller issued a final determination in November 2012 which assessed Business over $6.4 million in taxes, fees, and interest.

In December 2012, Business appealed the tax assessment to the Maryland Tax Court, arguing that only a vendor of rooms, and vehicles was required to pay sales tax, and that as an online travel company it neither owned nor controlled the right to possess any of the rooms or vehicles that might give rise to sales tax liability.  Business further argued that the Maryland General Assembly’s 2015 amendment of the Tax Code to expand the definition of “vendor” to include “accommodations intermediaries” supported its position that it was excluded from the definition of “vendor,” and thus not subject to sales tax until 2015.  In December 2017, the Tax Court held Business liable for sales tax because Business was engaged in the business of a retail vendor, sold the right to occupy rooms or rent vehicles, and that the act of facilitating such reservations and rentals constituted sale of tangible personal property subject to sales tax.  However, the Tax Court found Business not negligent in failing to pay the tax during the audit period, to have made a good faith appeal, and to be entitled to enjoy a four-year statute of limitations, arriving at an adjusted assessment of $295,000.

Both parties petitioned for review in the Circuit Court for Anne Arundel County.  The Circuit Court in 2018 heard Comptroller’s appeal and affirmed the Tax Court’s decision.  The circuit court initially dismissed Business’s appeal for procedural errors, but in 2019 vacated the dismissal, heard the appeal, and affirmed the Tax Court’s decision.

In May 2019 Comptroller noted its appeal to the Court of Special Appeals, which stayed the appeal pending the circuit court’s decision on Business’s appeal.  In March 2020 the Court of Special Appeals lifted the stay and consolidated the appeals.  Prior to consideration by that court, Business petitioned and the Comptroller cross-petitioned to the Court of Appeals for certiorari, which the Court of Appeals granted.

Analysis: 

The Court initially noted that the Tax Court’s interpretations of tax law often necessarily involve mixed questions of fact and law entitled to a degree of deference and that it would use the same standard of review appropriate to administrative agencies’ factual findings: whether a reasoning mind could reasonably have reached the agency’s conclusion.  By contrast, the Tax Court’s purely legal conclusions would be afforded great weight, but would not bind the Court and would be considered de novo.

The Court continued its inquiry with statutory construction in order to construe § 11-102(a) (which imposes sales and use tax liability on “retail sale in the State; and a use, in the State, of tangible personal property or a taxable service”) as it existed during the audit period in question.  In order for Business to be liable, its conduct must have been both (1) “a sale or use” (2) “of tangible personal property”.  Finding hotel rooms and car rentals to clearly qualify as concerning tangible personal property or rights thereto, the Court turned to whether the transactions constituted a sale or use.

Evaluating relevant contract language of contracts spanning 2004 to 2010 between Business and its various third-party providers, the Court determined the contracts not to have transferred title or possession of the hotel rooms or rental cars to Business, but merely to have given Business the right to make those rooms and cars available to customers of its web portal and thereby broaden the distribution of the third-party providers’ products and services. Business did not purchase inventory nor accept any risk of loss of that inventory pursuant to the contracts.  The third-party providers remained owners & operators of their hotels and vehicles. Business merely facilitated transactions between customer and provider. In light of that analysis, the Court found Business’s transactions not to have constituted a sale or use under § 11-102(a), and not to be liable for sales tax in the audit period.

The Court similarly found Comptroller’s alternate argument unavailing: that Business should be liable for sales tax as an out-of-state or retail vendor under § 11-701(b) or (c). The Court’s earlier analysis finding Business not to have acquired title or possession of the tangible personal property meant Business could not possibly qualify as an 11-701(b) out-of-state vendor or 11-701(c) retail vendor because Business’s conduct did not meet the Tax Code’s definition of a sale.  Nor were the third-party providers acting as agents of Business within the State; each party acted according to contractually-agreed terms for mutual benefit.  Business facilitated the transaction but third-party providers ultimately delivered the rooms and vehicles.

The Court determined that, as it existed during the audit period, the sales and use statute (1) excluded online travel companies from the definition of vendor (2) left no debate about whether Business’s service concerned tangible personal property, but (3) left open whether an online travel company (such as Business) constituted a vendor that sold or delivered such tangible personal property.  In 2015, the Maryland General Assembly clarified that third item by expanding the statutory definition of vendors to specifically include “accommodations intermediaries,” or those other than an accommodations provider who facilitate the sale or use of an accommodation for a fee.  The Court found this subsequent clarification by the General Assembly in adding  “accommodations intermediary” to the statutory definition of vendor meant that an intermediary such as Business was not a vendor liable for sales tax prior to the amendment; to find otherwise would render the new language mere surplusage. As to any potential ambiguity in the statute before the 2015 amendment, the Court interpreted that ambiguity in Business’ favor to further conclude that Business was not liable for sales tax during the audit period.

Accordingly, the Court reversed, finding the circuit court to have erred in its decision affirming the Tax Court.

Three Judges noted their dissent and would have affirmed the Tax Court’s conclusion that Business was a “vendor” under the Tax Code as it existed during the audit period.

The full opinion is available in PDF.