Tapestry, Inc. v. Factory Mutual Insurance Company (Supreme Court of Maryland)

 Tapestry, Inc. v. Factory Mutual Insurance Company (Supreme Court of Maryland)

Filed: December 15, 2022

Opinion by: Chief Justice M. Fader

Holding: The Supreme Court of Maryland held that a retailer’s all-risk property insurance policy, that provided coverage for all risks of physical loss or damage to the insured premises, did not cover the retailer’s losses due to the COVID-19 Pandemic as insured premises did not suffer any tangible, concrete, and material harm. The Supreme Court of Maryland answered the certified question of law for the United States District Court for the District of Maryland.

Facts: Tapestry, Inc. is a retailer operating stores nationwide, including 15 stores in Maryland.  Tapestry obtained two “all-risk” commercial property insurance policies from Factory Mutual Insurance Company (“FM”) during the COVID-19 Pandemic.  The insurance policies insured the property against all risks of physical loss or damage.  The policies did not define “physical loss or damage.” Tapestry provided a coverage notice to FM citing the COVID-19 Pandemic.  FM denied coverage as Tapestry could not show that the presence of COVID-19 causes physical loss or damage.  Tapestry filed suit in the Circuit Court for Baltimore County.  FM removed the case to the United States District Court for the District of Maryland.  In its complaint, Tapestry sought a declaratory judgment that the two policies issued by FM covered the losses it had suffered, and that FM was responsible for paying Tapestry’s claim. Tapestry also sough an award of damages for FM’s breach of contract in denying coverage under the two policies.  FM moved to dismiss the complaint. Tapestry filed an opposition to the motion to dismiss and a motion to certify a question of law to the Supreme Court of Maryland. The United States District Court for the District of Maryland granted the motion to certify the question of law and issued the Certification Order.

Analysis: The Supreme Court of Maryland interpreted “physical loss or damage” by analyzing the plain meaning of and interpreting the phrase in the context of the two policies.  Tapestry argued that the plain meaning of “physical loss or damage” embraces the functional loss of use of the property. Tapestry argued that the two policies use of “loss” and “damage” implied that they have different meanings and both could not require physical damage to property. The Supreme Court of Maryland disagreed, believing that the term involved tangible, concrete, and material harm to the property.  The Supreme Court of Maryland believed Tapestry’s interpretation of a functional loss renders “physical loss or damage” meaningless in the policies, including the Time Element coverage and the Interruption by Communicable Disease, both of which clearly require tangible, concrete, and material harm to the property. The Time Element coverage must be the result of “physical loss or damage” that results from a covered cause, not a functional loss.  The Interruption by Communicable Disease does not require “physical loss or damage” as it is triggered by the restriction on access to the premises, undermining Tapestry interpretation of a functional loss requirement. Assuming what is known about the Coronavirus, the Supreme Court of Maryland concluded that the presence of Coronavirus in the air and on the surfaces of Tapestry’s properties did not cause “physical loss or damage” as is required under the policies.  The Supreme Court of Maryland further interpreted recent insurance claims as a result of the COVID-19 Pandemic including, GPL Enterprise LLC v. Certain Underwriters at Lloyd’s, 254 Md. App. 638 (2022), addressing similar arguments made by Tapestry, to conclude that physical loss or damage “requires tangible, concrete, and material harm” to the property.  The Supreme Court of Maryland answered the certified question of law that the Coronavirus cannot cause “physical loss or damage” without tangible, concrete, and material harm to the property or deprivation of possession of the property. 

The full opinion is available in PDF.

Nesbitt v. Mid-Atlantic Builders of Davenport, Inc. (App. Ct. Md.)

 Filed: September 28, 2022

Opinion by: J. Beachley

Holding: The court held that a trial court that compels arbitration retains jurisdiction after an arbitrator has entered an award over the case, even if a party voluntarily dismisses the case pending before the trial court. 

 

Facts: Appellants, Gwendolyn and Leeroy Nesbitt, filed a class action lawsuit against Appellee Mid-Atlantic Builders of Davenport, Inc., in the circuit court for Prince George’s County, alleging violations of certain statutory disclosure requirements related to water and sewer assessments in the sale of residential real property. The circuit court stayed the case pending arbitration based on the terms of the sales agreement that contained an arbitration provision, and after an adverse ruling against the Nesbitts by the arbitrator, Appellants filed a Notice of Dismissal with the circuit court. However, the circuit court struck the Notice, confirmed the arbitration award, and awarded attorney’s fees to the Respondents, resulting in an appeal by the Appellants.

 

Analysis: The Court found that while a plaintiff retains the absolute right to voluntarily dismiss a case at any time before the adverse party files an answer under Md. Rule 2-506(a), there was no Maryland case on point as to how to proceed where a trial court has compelled arbitration, and the Notice is filed after an award was made by the arbitrator. The Court found the reasoning of the 11^th Circuit persuasive that while a plaintiff could dismiss its own claims in the stayed proceeding that ordered arbitration, the trial court retains jurisdiction over the case to confirm or vacate the resulting arbitration award. PTA-FLA, Inc. v. ZTE USA, Inc., 844 F.3d 1299 (11^th Cir. 2016). In the event the defendant had filed a motion to confirm the arbitration, the trial court retained jurisdiction over this collateral claim, even when the plaintiff filed a Notice of Dismissal. Id. at 1308.

 

In the present case, the Court found that Maryland Rule 2-506(a) was substantively similar to its federal claim dismissal rule in Federal Rule 41(a)(1). In addition, the Court found that the Maryland Uniform Arbitration Act provides post-arbitration award procedures for the trial court that originally stayed to compel arbitration, including jurisdiction to modify, correct, vacate, or confirm the arbitration award. Md. Courts & Jud. Proc. Code Ann. § 3-201, et seq. (2020). The Court interpreted the Maryland dismissal and post-arbitration award procedures to conclude that the circuit court retained jurisdiction over a collateral claim, such as the defendant’s motion to confirm the arbitrator’s award, based on the 11^th Circuit’s interpretation of similar federal statutes, thereby affirming the trial court’s order.

 

Full opinion here.

 

Access Funding, LLC v. Linton (Sup. Court of Md.)

 Filed: December 1, 2022

Opinion by: J. Watts

Holding: The court held that the question of whether an arbitration agreement existed between Respondents and Petitioner factoring companies that purchased certain structured settlement agreements concerning lead paint poisoning was not a question to be decided by the arbitrator.

 

Facts: Structured settlement agreements are regulated by statute under Maryland law and generally require that such agreements are approved by a court after the payee receives independent advice as to the arrangement. Md. Courts & Jud. Proc. Code Ann. §§ 5-1101 – 5-1112. The Court noted that this statute had been amended several times since 2000, generally increasing the scrutiny to which such agreements are subjected by courts.

 

Respondents, Crystal Linton and Dimeca D. Johnson, were both lead paint tort plaintiffs who had each obtained structured settlements, and who signed agreements transferring the rights in these agreements to Petitioner Access Funding LLC and Assoc, LLC, in exchange for discounted lump sum cash payments. These agreements contained broad, mandatory arbitration clauses, including a provision that required that the validity of the arbitration agreement “shall be resolved by mandatory binding arbitration.”

 

After substantial litigation, including class certification and attempted settlement of the class action suit by the parties, the circuit court ordered the case to be arbitrated, over the objection of Respondents. 

 

Analysis: The Court’s analysis begins with the strong presumption that written arbitration agreements are generally enforceable under federal and state law, and that the Maryland Uniform Arbitration Act (“MUAA”) “’strictly confines the function of the court in suits to compel arbitration to the resolution of a single issue – is there an agreement to arbitrate the subject matter of a particular dispute.’” Md. Courts & Jud. Proc. Code Ann. §§ 3-201 to 3-234; Gold Coast Mall Inc. v. Larmar Corp., 298 Md. 96 (1983).

 

In the present case, however, the Court found that the circuit court erred when that court decided that the issue of whether the arbitration agreement was valid was itself subject to arbitration. Instead, the Court found that the Respondents’ complaint contained allegations that the arbitration agreement was obtained by fraud and deceit, and that the court reviewing the structured settlement agreement would not have approved of the agreement had it been aware of the relationship between Smith (the purportedly independent attorney hired to advise Respondents under the state law) and one of the Petitioner factoring companies. 

 

The Court distinguishes two cases raised by Petitioners: Prima Paint and Holmes. In Prima Paint, the US Supreme Court held that absent an allegation that the arbitration provision within an agreement (rather than the agreement as a whole) was procured through fraud, an otherwise broad arbitration clause would require that an arbitrator rather than a federal court would decide the issue of fraud in the inducement to enter into the overall agreement. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). The Court’s gloss of Holmes v. Coverall N. Am. Inc., 336 Md. 534 (1994) is that where a trial court finds the arbitration clause itself to be valid, the remainder of the question of validity of the entire agreement is a matter for the arbitrator rather than the court. 

 

The Court, however, distinguishes the present case by holding that the Respondent’s complaint specifically alleges that Petitioner’s use of Smith as counsel was intended to prevent Respondents from understanding the arbitration provision, thereby engaging in fraud in the inducement to that severable clause, and the enforceability of the arbitration clause was conditioned on the closing of the transaction, which itself was conditioned on entry of an order of approval by a court of competent jurisdiction as required by Maryland law. If such order was obtained by an “extrinsic” fraud, such as that the attorney purportedly representing Respondents was part of a scheme with Petitioners to prevent Respondents from understanding the arbitration agreement contained within the structured settlement contract, then such arbitration agreement is subject to collateral attack, which ultimately must be decided by a court rather than an arbitrator under MUAA.

 

As a result, the Court affirmed the reversal of the circuit court’s order compelling arbitration.

 

 

Full opinion here.

 

Brown v. Brown's Maryland Motors, Inc. (Md. U.S.D.C.)

 Filed: June 10, 2022

Opinion by: J. Bredar

Holding: The court held that the arbitration provision within the employment agreement between Plaintiff James D. Brown and Defendant Brown’s Maryland Motors, Inc. was enforceable as to Plaintiff under Maryland law.

 

Facts: Plaintiff was a department manager of Defendant’s car dealership. In 2015, Plaintiff signed an employment agreement that contained a broad arbitration agreement clause, and was subsequently terminated in 2019 from his employment for allegedly raising complaints about ongoing sexual harassment of several employees by a senior manager at the dealership. Plaintiff filed a charge of discrimination with the EEOC and was issued a right to sue letter. After filing of his timely federal lawsuit, Defendant moved to compel arbitration of the dispute.

 

Analysis: Plaintiff challenged the enforceability of the arbitration agreement on several grounds, including invalidity under Maryland law and that the agreement would foreclose him from effectively vindicating federal statutory rights.

 

The Court, in particular, evaluated whether the arbitration clause was unconscionable under Maryland law. To demonstrate unconscionability, the Plaintiff has the burden to show that the arbitration provision is both procedurally and substantively unconscionable. As to the former, such clause must be shown to be extremely unfair to the Plaintiff because of a lack of meaningful choice and contractual terms that unreasonably favor the other party. Walther v. Sovereign Bank, 872 A.2d 735, 743 (Md. 2005). As to the latter, such clause must be shown to either unreasonably favor the dominant party, impair the bargaining process or otherwise violate public policy, attempt to alter fundamental duties otherwise imposed by law, or are otherwise unreasonably and unexpectedly harsh. Id. at 744.

 

As to procedural unconscionability, the Court found that the Plaintiff failed to allege facts sufficient to establish that Plaintiff lacked sufficient choice or the ability to negotiate with his employer. Instead, relying on Falls, the Court found that Plaintiff was in a similar position to a CEO who was highly compensated and a sophisticated employee that made high value contributions to the company. Falls v. 1CL, Inc., 67 A.3d 521, 535 (Md. 2012). As a result, the Court found that Plaintiff failed to demonstrate procedural unconscionability of the arbitration agreement.

 

As to substantive unconscionability, the Court found that the Plaintiff’s allegations were insufficient to support a finding of substantive unconscionability, even if such terms operated to the perceived detriment of the weaker party.

 

Alternatively, the Court evaluated whether the arbitration clause would prevent Plaintiff to be able to vindicate his federal statutory rights on the grounds that the cost of arbitration would be too and the arbitrator would not permit sufficient discovery for Plaintiff to make his case. The Court found as to the former that Plaintiff had merely speculated as to the cost of the case when the Plaintiff could have actually obtained an estimate of the arbitration fee from the arbitrator, and that even accepting Plaintiff’s high estimate of $31,000, the Court found that such costs were not prohibitive in light of Plaintiff’s value of his claim at over two million dollars. As to the issue of discovery, the Court found that the rules of the arbitrator may require limited discovery, but that the Plaintiff’s conclusions that discovery would be inadequate was “factually inaccurate and procedurally premature.”

 

As a result, the Court granted Defendant’s motion to compel arbitration.

 

 

Full opinion here.

 

Cherington Condo. v. Kenney (App. Ct. Md.)

 Filed: March 31, 2022

Opinion by: J. Leahy

Holding: The court held Appellee Heather Kenney’s claims before the Commission on Common Ownership Communities for Montgomery County (“CCOC”) sufficiently alleged that the Board of Appellant Cherington Condominium Association violated the business judgment rule by potentially entering into an interested transaction, which required a showing that the Board’s decision was fair and reasonable to the Association.

Facts: Appellee is a resident of one of the twelve, “garden-style” units within the Appellant condominium development. The remaining eighty-seven units are “townhouse-style” units. While all unit owners are eligible to serve on the Appellant’s Board, only townhouse-style owners served on the board in 2019, when the challenged budget was ratified. Appellee asserted that the 2019 budget violated the Association Declaration and Bylaws by requiring “garden-style” unit owners to contribute to the cost of maintaining outdoor spaces around the townhouse-style units. Included within the 2019 budget was an assessment increase of $47 per month for townhouse-style units, but a $112 per month for garden-style units.

Analysis: The Appellate Court of Maryland* reasoned that decisions of boards of condominium associations are subject to the business judgment rule, which is a “‘presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.’” Such presumption can be overcome if the person challenging a board’s decision can demonstrate either that the board acted by way of fraud or in bad faith, or if the person can show that a board member had a conflict of interest related to the board’s decision. If there is evidence of a conflicted transaction, the burden shifts to the board to show that the decision was “just and proper.”

In addition, the Court reasoned that the codification of Corporations and Associations Article § 2-419 did not fully supplant the common law on interested director transactions, though the section does provide a method for establishing a particular interested transaction is just and proper by way of disclosure of the conflict prior to a vote by disinterested board members on the transaction.

In the present case, the Court found that the board was comprised entirely of interested board members, as all board members were townhouse-style unit owners who all could benefit from the contract for landscaping which included costs only applicable to outdoor spaces around the townhouse-style units, but which would be subsidized by garden-style unit owners. The Court remanded the case to CCOC to make findings of fact related to the landscaping contract, including whether the contract was fair and reasonable in light of the interested director transaction rule.

 
* At the time this opinion was issued, Maryland’s intermediate court was named the “Maryland Court of Special Appeals.” However, the voters of Maryland adopted a constitutional amendment in the 2022 election that changed the name of Maryland’s appellate courts, such that this court is now called the Appellate Court of Maryland.
 
Full opinion here.

Myong Nam Kim v. Board of Liquor License Commissioners for Baltimore City (App. Ct. Md.)

Filed: June 29, 2022

Holding: A Maryland statute that allowed certain beer, wine, and liquor license holders in a certain area of a legislative district to exchange their licenses for other licenses under certain circumstances and restricted the hours of operation for certain licensees in a separate area of the same legislative district did not violate the one subject requirement in Article III, § 29 of the Maryland Constitution and was not shown to violate equal protection as guaranteed by the Fourteenth Amendment to the United States Constitution and Article 24 of the Maryland Constitution.

Opinion by: Judge Donald E. Beachley

Summary: Three Class B-D-7 beer, wine, and liquor license holders (the “Licensees”) in Baltimore City (the “City”) were cited for violating a statute that (i) allowed Class B beer, wine, and liquor license holders in a certain area of the City to exchange their licenses for Class B-D-7 licenses, provided that the license holder executed a memorandum of understanding with a local community association; and (ii) restricted the hours of operation for Class B-D-7 licenses in a separate area of City where the Licensees where located.  The Licensees challenged their citations before the Board of Liquor License Commissioners for Baltimore City (the “Board”), arguing that the statute was unconstitutional because (i) it violated Article III, § 29 of the Maryland Constitution, which requires that all laws enacted embrace but a “single subject” and; (ii) it violated equal protection as guaranteed by the Fourteenth Amendment to the United States Constitution and Article 24 of the Maryland Constitution, because the law improperly targeted African Americans because the restriction of operating hours impacted a predominantly African American community.  The Board held that the statute did not violate the single subject requirement and that the Licensees did not produce evidence to support their equal protection claim.  The Licensees appealed the Board’s decisions to the Circuit Court for Baltimore City.  The Circuit Court affirmed the Board’s decision with respect to the single subject holding but reversed the Board’s decision with respect to the equal protection holding.  On appeal from the Circuit Court, the Court of Special Appeals affirmed the Board’s original decisions.

Analysis: The Court of Special Appeals began its analysis by discussing the rationale underlying the single subject provision.  First, it “prevent[s] members of the legislature from either selfishly or surreptitiously inserting unnecessary provisions which, standing alone, would likely not receive sufficient support to pass.”  Second, it preserves the integrity of the governor’s veto power by preventing “a practice under which the legislature could include in a single act matters important to the people and desired by the Governor and other matters opposed by the Governor or harmful to the welfare of the state, with the result that in order to obtain the constructive or desired matter the Governor had to accept the unwanted portion.”  The Court then noted its historically deferential approach to evaluating whether legislation violated the single subject rule, noting that a statute violates the single subject requirement only when the statute involves “two distinct and incongruous subjects” but that “a statute’s constitutionality may be upheld if the act’s subjects are ‘germane’ to one another, meaning that they have a ‘connection and interdependence’.” The Court further noted that “[i]f several sections of the law refer to and are germane to the same subject-matter, which is described in its title, it is considered as embracing but a single subject, and as satisfying the requirements of the Constitution in this respect.”  Applying these concepts, the Court held that, although the statute accomplished two separate things, the statute clearly referred to and were germane to the same subject matter—the overall regulation of alcohol in the City—and the statute thus did not violate the single subject requirement.  Additionally, the Court found that the legislative history showed that the two components of the statute were not put together in a way that implicated the underlying rationale for the requirement.

Next, the Court of Special Appeals addressed the Licensee’s argument that the statute failed the “strict scrutiny” test and thus violated equal protection as guaranteed by the United States and Maryland Constitutions.  The Court noted that the strict scrutiny test applies when evaluating a statute that “‘creates a distinction based upon clearly suspect criteria (such as race, gender, religion, or national origin), or when it infringes on a ‘fundamental’ right.’”  The Court then noted that the strict scrutiny test “will invalidate a statute … unless it ‘is necessary to promote a compelling governmental interest.’”  Finding that the statute is facially neutral, the Court held that the Licensees had the burden of establishing that a discriminatory purpose was a motivating factor in enacting the statute.  In reviewing the record, the Court found that the Licensees relied only on legislative history materials concerning the statute and Census data showing that the areas of the City affected by the operating restrictions were all approximately 90% African American but that contiguous areas of the City unaffected by the statute were closer to 5% African American.  Based on the record, the Court of Special Appeals held that “The Licensees failed to meet their burden. Their reliance on the legislative history materials concerning Chapter 389, as well as the Census data showing the racial distribution of different neighborhoods in Baltimore City simply show, at most, a racially disparate impact. That evidence does not, however, demonstrate the discriminatory intent or purpose necessary to support strict scrutiny review for equal protection purposes. In fact, our thorough review of the record in this case, including all of the legislative history materials available from the General Assembly, reveals that the sponsors and supporters of Chapter 389 were solely focused on curtailing crime in the region—not on discriminating against a suspect class.”

The full opinion is available in PDF.