Norino Properties LLC v. Balsamo (Md. Ct of Special Appeals)

Filed: December 15, 2021

Opinion By: J. Graeff

Holding: The Court of Special Appeals affirmed the decision of the in banc Circuit Court, finding that the trial court’s dismissal with prejudice of plaintiff was an abuse of discretion, and granted plaintiff leave to amend his complaint against the defendants. The Court also held that in banc review of a dismissal with prejudice was within the notion of a “trial” under Article IV § 22 of the Maryland Constitution.

 

Facts: Plaintiff Joseph Balsamo originally filed a lawsuit in 2012 against his co-owner, Defendant John Zorzit, and their company, Balsamo and Norino Properties, LLC (the “LLC”), seeking judicial dissolution of the LLC. In 2015, the trial court entered an order denying the request for judicial dissolution, but ordering an independent account of the LLC capital accounts. In 2019, Plaintiff filed a new lawsuit against Defendant Zorzit and the defendant’s entity, Norino Properties, seeking judicial dissolution of the LLC and several other causes of action in contract, tort, and constructive fraud.

 

The defendants filed a motion to dismiss for failure to state a claim and on the grounds of res judicata, as the defendants argued that the claims in the 2019 complaint had already been decided on the merits in the prior litigation. A hearing was held on January 9, 2020 before the circuit court on the motion, which included a colloquy between Mr. Balsamo’s attorney and the court concerning additional evidence obtained during discovery that would support amendment of the complaint to plead actual fraud on the part of the defendants. In a written memorandum, the trial court dismissed plaintiff’s amended complaint with prejudice, and the plaintiff filed a motion to alter or amend the dismissal, supported by an affidavit of additional testimony that would support amendment of the complaint and would be offered at a hearing for a preliminary injunction. This motion to alter or amend was denied and the Plaintiff filed a Notice of In Banc Review with the circuit court. The court assigned three circuit court judges to the in banc panel, and that panel reversed the trial court’s dismissal of plaintiff’s amendment complaint, with thirty days leave to file a second amended complaint. An appeal was taken by the defendants to the Court of Special Appeals, alleging that in banc review was improperly granted under Article IV § 22 of the Maryland Constitution.

 

Analysis: In banc review is authorized by Article IV, § 22 of the Maryland Constitution, which provides: “where any trial is conducted by less than three Circuit Judges, upon the decision or determination of any point, or question, by the Court, it shall be competent to the party, against whom the ruling or decision is made, upon motion, to have the point, or question reserved for the consideration of three Judges of the Circuit, who shall constitute a court in banc for such purpose…” At issue before the Court of Special Appeals was whether “trial” in § 22 encompassed review of a final judgment such as a motion to dismiss with prejudice.

 

The Court reviewed prior case law involving in banc review and the definition of trial, and on balance found that a trial in the context of such review is available after “an action by which issues or questions of fact are decided” and that results in a final judgment, including a motion to dismiss a complaint with prejudice.

 

Full opinion here.

Hardwire LLC v. Ebaugh (Maryland U.S.D.C.)

Filed: August 25, 2021

Opinion by: J. Bredar

 

Holding: The court held that Hardwire’s claim of ongoing misappropriation of its trade secrets by the defendants that began prior to the amendment of the federal RICO statute to include the misuse of trade secrets as a racketeering activity in 2016 could not sustain personal jurisdiction over the Freyssinet defendants, and that alternative theories of personal jurisdiction were insufficient to prevent dismissal of the Freyssinet defendants from the action against Ebaugh.

 

Facts: Ebaugh was a former employee of Hardwire LLC, who was terminated in February, 2013 and formed a competitive business, Infrastructure Armour, LLC, allegedly using Hardwire’s trade secrets and confidential information to obtain a multi-million-dollar bridge contract from Freyssinet International. Hardwire’s theory of the case is that Freyssinet was using Hardwire’s confidential proposals for a bridge project in New York to seek a proposal from Ebaugh through his company that would undercut Hardwire’s bid. After learning about this information sharing arrangement, Hardwire amended its complaint to add Freyssinet International and Freyssinet USA as defendants on the theory that the defendants had engaged in a violation of the RICO statute, federal and state trade secrets laws, fraud, civil conspiracy, and violations of the federal Sherman anti-trust statute.

 

At issue in the case is whether Hardwire properly stated a claim under the RICO statute at 18 U.S.C. § 1965(d), which such claim permits nationwide service of process on a defendant and the exercise of personal jurisdiction in any federal district court under Rule 4(k)(1)(C).

 

Analysis: A plaintiff must plausibly allege four elements to state a claim under the RICO statute: (1) conduct causing injury to business or property, (2) of an enterprise, (3) through a pattern, (4) of racketeering activity. “Racketeering activity” includes numerous criminal violations including the theft of trade secrets under 18 USC § 1832(a) as amended by Congress under the “Defense of Trade Secrets Act” (DTSA) on May 11, 2016. However, courts presume that amendments to RICO do not apply retroactively absent continued engagement by a defendant after the effective date of the amendment.

 

Hardwire alleged that the use and disclosure by Freyssinet USA of Hardwire’s trade secrets that began in 2013 continues to the present is “continued engagement” under DTSA. The court, however, found that the initial theft of trade secrets that occurred before the amendment of DTSA, was separate from the ongoing use of those same trade secrets before and after the amendment, resulting in Hardwire failing to state a claim under the RICO statute.

 

The court evaluated alternative bases for the exercise of personal jurisdiction over Freyssinet, including civil conspiracy under the Maryland long arm statute and the “100-Mile Bulge Rule.” As to the former, the court found that the plaintiff had failed to allege what overt acts were taken in Maryland by Ebaugh and Infrastructure Armour LLC with Freyssinet, given that the bridge project at issue here occurred in New York for a New York bridge, or would have occurred where Freyssinet USA had incorporated and located its principal place of business in Virginia.  As to the latter, the court found that the plaintiff had failed to demonstrate how the 100-Mile Bulge Rule in Rule 4(k)(1)(B) would apply to Freyssinet, as the defendants were joined under Rule 20(a)(2), but the Rule applies to joinder under Rules 14 or 19 of the FRCP.

 

Full opinion here.

Pizza di Joey, LLC and Madame BBQ, LLC v. Mayor and City Council of Baltimore, 470 Md. 308 (Ct. of Appeals)

Filed: August 17, 2020

Holding: The City 300-foot rule that prohibits food trucks from operating within three hundred feet of a brick and mortar restaurant that serves food similar to the food truck is not unconstitutional under Article 24 of the Maryland Constitution, and is not void for vagueness because, though there was a lack of guiding standards for enforcement, there are circumstances where the ordinance would be constitutional.

Opinion by: Judge Jonathan Biran

Summary: Two food truck operators (the “Food Trucks”) filed suit against the Mayor and City Council of Baltimore (the “City”) in the Circuit Court for Baltimore City, seeking a declaration that a provision of the City’s vending ordinance restricting food trucks from parking within 300 feet of a brick-and-mortar restaurant that primarily sells the same type of food (the “300-foot rule” or the “Rule”), deprives them of equal protection and substantive due process of law in violation of Article 24 of the Maryland Declaration of Rights.  After taking evidence, the Circuit Court held that the 300-foot rule does not violate Article 24’s equal protection and substantive due process requirements.  However, the Circuit Court sua sponte enjoined the City from enforcing the 300-foot rule, concluding that the Rule is impermissibly vague, notwithstanding that the Food Trucks had affirmatively waived the vagueness claim.  On appeal, the Court of Special Appeals ruled in favor of the City, finding that (i) the 300-foot rule does not violate Article 24’s equal protection and substantive due process requirements, (ii) the Food Trucks had not preserved a vagueness claim for appellate review, and (iii) any claim for vagueness failed on the merits.  On appeal, the Court of Appeals affirmed the Court of Special Appeals.

Analysis: The Court of Appeals began its analysis by determining whether the Food Trucks had standing to assert their substantive due process and equal protection claims, noting that “[u]nder Maryland common law, standing to bring a judicial action generally depends on whether one is aggrieved, which means whether a plaintiff has an interest such that he or she is personally and specifically affected in a way different from the public generally.”  The Court held that the Food Trucks had standing to challenge the Rule’s constitutionality because the record established, among other things, that (i) they paid for and received mobile vendor licenses; (ii) they would have operated in various commercial districts in the City of Baltimore but for the Rule and would have received substantial benefit from operating in those districts; and (iii) they altered their business plans as a result of the Rule.

Next, the Court of Appeals addressed the appropriate level of review for the constitutionality of the Rule and found that the deferential “rational basis” test was appropriate because it did not involve a “clearly suspect” criteria or infringe on a “fundamental” or “important personal” right.  The Court of Appeals then held that the Rule satisfied the rational basis review because “the restriction on the locations where the Food Trucks may operate are not arbitrary, oppressive, or unreasonable. To the contrary, the Rule directly furthers the City’s conception of what is necessary for its general welfare.”  The Court further held that the Rule would satisfy the more demanding “heightened rational basis” standard of review because the Rule “bears a ‘real and substantial relation’ to the legitimate interest the City has in ensuring the vibrancy of its commercial districts and, thereby, promoting the general welfare.  Among other things, the Court noted that the Rule avoided the “‘free rider’ problem posed by food trucks siphoning business from brick-and-mortar restaurants after those restaurants have invested their resources and become semi-permanent members of the neighborhoods in which they are based.”

Finally, the Court of Appeals addressed the claim that the Rule is void for vagueness.  The Court noted that the Circuit Court erred by invalidating the 300-foot rule based on a vagueness claim because the Food Trucks had affirmatively waived the claim.  However, because of that error, the Court concluded that it had authority to address the merits of the question.  First, the Court of Appeals held that the Rule was subject to a facial vagueness challenge because there was a lack of guiding standards regarding enforcement, such that “there is a high risk that authorities necessarily will enforce the law arbitrarily.”  Next, the Court noted that, “in order to prevail on a facial vagueness claim, the person challenging the statute must show that there is no set of circumstances under which the statute would be constitutional.”  Applying this standard, the Court held that the Rule was not unconstitutionally vague because there were obvious circumstances under which the statute would be constitutional (e.g., Pizza di Joey parking its food truck within 300 feet of a brick-and-mortar pizzeria).  The Court further held that the phrases used in the Rule, such as “primarily engaged in” and “same type”, are not vague because while not defined in the ordinance, they are common and have generally accepted meanings.

The full opinion is available in PDF.

Denise Potter, et al. v. Ruby Potter (Md. Ct. of Spec. Appeals)

Filed: September 13, 2021.

Opinion: Christopher Kehoe

Holding: 

Decedent’s membership interest in a limited liability company (LLC) was “property” under Maryland estate law that passed to decedent’s estate where LLC’s operating agreement which required the membership interest to pass to named successor was not a valid will under Maryland law. 

Facts: 

James Potter (“James”) owned an interest in a Maryland LLC. The members executed an operating agreement and a members’ agreement. The LLC’s operating agreement distinguished between a member’s “interest,” which was defined as that member’s right to share in the profits and losses of the LLC, and the member’s “rights,” which was the right of a member to participate in the management of the LLC. The members’ agreement stated that, upon a member’s death, that member’s interest and right in the LLC shall be transferred to the individual identified in the members’ agreement. 

According to the members’ agreement, James’s membership interest was to be transferred to Ruby Potter, and James’s membership rights were to be transferred to two other members of the company. Although James signed both the operating agreement and the members’ agreement, the record showed that the signing of operating agreement was not witnessed and the members’ agreement was witnessed by only one individual. 

James acquired his LLC interest after his marriage to Ruby Potter (“Ruby”) in 1984. However, James and Ruby separated in 2016. Subsequently, James married Denise Potter (“Denise”). Despite his divorce and subsequent re-marriage, James did not amend the members’ agreement to remove Ruby as his successor.  In 2017, James died intestate. 

Denise opened a small estate and was appointed as personal representative of James' estate. In a document filed with the orphans’ court, Denise identified James’s membership interest in the LLC as an asset of the estate. Thereafter, Ruby filed a complaint for declaratory judgement seeking a declaration that she was entitled to James’s membership interest as she was listed as his successor in the members’ agreement. 

The Circuit Court held that Ruby was entitled the interest because the members’ agreement was a contract which controlled the passing of James’s membership interest. The Court of Special Appeals reversed, for the reasons stated below. 

Analysis:

The Court held that the membership interest was “property” as defined by the Estates and Trusts code which passed to James’s estate because the operating agreement and members’ agreement were not valid testamentary instruments under Maryland law. The Court reached its holding after considering three questions: (1) whether the operating agreement and the members’ agreement are testamentary in nature; (2) whether Maryland law permits an LLC to agree that a member’s interest can transfer by means of an agreement that does not satisfy the statute of wills; and (3) whether there is any conflict between the Estates and Trusts code and the article governing limited liability companies. 

(1) The operating agreement and members’ agreement are not testamentary instruments that control disposition of the membership interest.

As the operating agreement and members’ agreement were not witnessed in accordance with the Estates and Trust code, the Court held that such documents were not testamentary instruments under Maryland law. However, the Court also had to decide whether James’s membership interest was “property” that fell within the scope of the Estates and Trusts code. The Estates and Trust Code provides that all “property” of a decedent is subject to the estates and decedents law, and thus may only pass via will or intestacy absent other statutory exception. See Md. Code Ann., Est. & Trusts §1-301. “Property” is defined as any interest that a decedent has in real or personal property except for property “which does not pass, at the time of the decedent’s death, to another person by the terms of the instrument under which it is held, or by operation of law.” Id. §1-201(r). 

Ruby argued that the operating agreement and members’ agreements were “instruments” under which the membership interest was held that required the interest to pass to another person. The conclusion being that, as a result, the interest was not “property” subject to the provisions of the Estates and Trusts code. The Court rejected this argument on the basis that “the relevant legislative history and caselaw indicate that the General Assembly did not intend for the definition of ‘property’” to mean what Ruby asserted. 

Legislative history revealed that “property” was intended to include “those assets which traditionally constituted what is sometimes called in Maryland the probate estate.” Potter v. Potter, 252 A.3d 17, 32 (Md. Spec. App. 2021), cert. granted, 259 A.3d 787 (Md. 2021). The Court looked to case law that established what constituted a testamentary instrument at the time the Estates and Trust code was enacted. The court concluded that “a writing that purports to transfer the maker’s property at death is testamentary in nature unless it is both irrevocable and based on an otherwise enforceable legal obligation whose performance is deferred during the maker’s lifetime.” Id. As a result, the Court held that the membership interest was subject to the Estates and Trusts code because the designation in the members' agreement was not irrevocable. Id. Indeed, the Court observed that James could have changed his designation at any time, but simply failed to do so. Id. As the interest was not irrevocable during James's lifetime, the court concluded that it fell within what would have been considered the "probate estate," and was accordingly "property" as defined by the Estates and Trusts code.    

(2) The Limited Liability Act did not Subvert the Estates and Trusts Code

Ruby argued that the limited liability act authorized companies to agree that Maryland’s testamentary laws do not apply to membership interests. This argument was based on section 4A-606 of the Corporations and Associations article which provides that, unless otherwise agreed, a member’s membership in an LLC terminates at death. Ruby argued that this provision allows LLCs to alter the default provisions and to agree to the disposition of membership interests upon the death of a member. 

The Court rejected this argument based on the clear wording of the LLC Act. The LLC Act allows an LLC to make operating agreements that are “not inconsistent” with “the laws of this State.” Md. Code Ann., Corps & Ass’ns, §4A-203(15). As discussed above, Maryland law imposes strict requirements on the disposition of property that falls within the Estates and Trusts code. As an LLC cannot make agreements inconsistent with Maryland law, the provisions of the operating agreement and members’ agreement which sought to disposed of James’s property were invalid as testamentary interests due to their non-compliance with the Estates and Trusts code. 

Finally, the court held that there was no conflict between the Estates and Trusts article and the Corporations and Associations article based on its holding that, under Corps & Ass’ns, §4A-203(15), an LLC operating agreement cannot be inconsistent with other state law.  

The full opinion is available here.