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.

Thomas v. Cameron Mericle, P.A. (Cir. Ct. Mont. Cnty)

Filed: October 4, 2018

Opinion by: Anne K. Albright

Facts: The following facts are as alleged by the plaintiffs in their complaint and recited in the Circuit Court’s decision.  Two homeowners’ associations (HOAs), through two law firms, separately sought to recover HOA dues from two individuals.  With respect to one individual, suit had been filed in a District Court of Maryland to recover the dues.  The law firm in that action threatened to move forward with trial unless the individual signed a confessed judgment promissory note to settle the matter.  The individual signed the note and made all the payments due under the note; however, the law firm confessed judgment against the individual and filed a complaint for judgment by confession in the District Court.  With respect to the other individual, the law firm threatened to file suit unless the individual signed a confessed judgment promissory note to settle the matter.  The individual signed the note and began making the payments due under the note; however, the law firm confessed judgment against the individual and filed a complaint for judgment by confession in the District Court of Maryland.  In both instances, the confessed judgment note included a clause that appointed an attorney on behalf of the individual, who had authority, without any prior notice to or approval from the individual, to file for entry of a confessed judgment against the individual, in a way that waived the individual’s right to assert a legal defense to any action.  The law firms knew or had reason to know that the HOA dues arose from a consumer transaction or debt.

Based on the facts set forth above, the two individuals filed suit against the law firms, asserting the following six claims: (1) violations of the Maryland Consumer Debt Collection Act (“MCDCA”); (2) negligent misrepresentation; (3) breach of contract; (4) fraud; (5) money had and received; and (6) declaratory judgment.  The plaintiffs subsequently abandoned the breach of contract claim.  The law firms moved to dismiss the five remaining claims for failure to state a claim upon which relief can be granted.  The law firms sought to have all of the claims dismissed with prejudice on the basis of res judicata, arguing that the individuals could have raised defenses to the confessed judgments with the filing of a timely motion in the District Court, and having failed to do so, the individuals were barred from bringing those claims in the Circuit Court action.  Alternatively, the law firms sought to have the claims dismissed on the basis of the facts plead and the merits of the claims.

Analysis/Holding:  The Circuit Court rejected the law firms’ res judicata argument, holding that, because the individuals’ claims were not mandatory counterclaims in the underlying confessed judgment proceedings before the District Court and were not litigated in those proceedings, the individuals were not precluded from asserting the claims in the Circuit Court.  The Court also noted that, even if they had wanted to, the individuals could not have asserted their claims in the confessed judgment proceedings because the claims were either equitable in nature or the amount in controversy exceeded $30,000, such that the claims fell outside the jurisdiction of the District Court.  

Next, the Court discussed the MCDCA claim (Count 1).  The Court noted that “[t]o prove an MCDCA violation, a plaintiff must prove that 1) defendant is a debt collector; 2) defendant’s conduct in attempting to collect a debt was prohibited by the MCDCA [(e.g., to claim, attempt, or threaten to enforce a right with knowledge that the right does not exist)]; and 3) the underlying debt is ‘consumer’ in nature.”  In seeking dismissal of the MCDCA claim, the law firms focused on the first and third elements listed above, arguing that because the debts arose out of confessed judgment promissory notes, which are settlements separate from the underlying consumer transaction, the law firms were not “debt collectors” seeking to collect “consumer” debt.  The Court rejected that argument, holding that “the Law Firms used Confessed Judgment Promissory Notes and then sought confessed judgments.  Because use of those notes and pursuit of those judgments are additional steps the Law Firms allegedly took in order to collect HOA dues, both steps are subject to the MCDCA.”  The Court ultimately dismissed the MCDCA claim on the basis that the plaintiffs failed to allege that the law firms had any actual or constructive knowledge of wrongful conduct, as required under the second element of the claim.  However, the dismissal was without prejudice and with leave to amend the complaint, with the Court noting that a viable MCDCA claim might be asserted if the law firms charged inappropriate “add-on” fees and costs, such as late charges, attorneys’ fees or default interest, with knowledge or reckless disregard of the fact that such add-on fees and costs were not properly chargeable.

The Court then dismissed the negligent misrepresentation claim (Count 2), with prejudice, holding that the plaintiffs failed to allege, and that the Court could not identify, a duty of care owed by the law firms to the individuals.  The Court next dismissed the fraud claim (Count 4) and the money had and received claim (Count 5) because the individuals failed to allege actual facts, rather than general allegations, in support of requisite elements of those claims.  Finally, the Court, having dismissed all of the other claims, held that there was no current actual controversy between the plaintiffs and the law firms, and dismissed the declaratory judgment claim (Count 6).

The full opinion is available in PDF.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

Small Business Financial Solutions, LLC v. Pearl Beta Funding, LLC (Cir. Ct. Mont. Cnty)

Filed: September 29, 2017

Opinion by: Harry C. Storm

Holding: A claim that a small business finance lender tortiously interfered with a contract and with the rights of a senior secured lender under the UCC could not be resolved on summary judgement because the lender had entered into a loan agreement with a customer despite having notice of the terms of an agreement between the customer and another lender, and questions of intentionality and collusion central to the plaintiff’s claims were questions of fact.

Facts: Plaintiff loaned a Kentucky-based chiropractic practice (the “Practice”) monies, which would be repaid through daily bank account debits. Under the loan agreement, Plaintiff had a security interest in the personal property and proceeds of the Practice. Also, the Practice was prohibited from disposing of Plaintiff’s collateral outside the ordinary course of business. Furthermore, as conditions of default, the Practice was prohibited from (1) selling any existing or future account receivables to any third party without the Plaintiff’s consent or (2) entering into any financing agreement requiring daily or weekly repayments. 

Plaintiff filed a UCC-1 Financing Statement and sent Notice Letters to small business finance lenders, including a predecessor-in-interest to Defendant. The Notice Letters notified the businesses of the terms of the loan agreements and warned that engaging in activities that violated the terms constituted an interference with Plaintiff’s contracts.

Subsequently, the Practice sought additional loans, including one from Defendant. In its application, the Practice disclosed the existing loans with Plaintiff. Defendant learned of the daily debits to Plaintiff and of the UCC-1 Financing Statement. Defendant required the Practice to represent and warrant that contracting with Defendant would not cause it to default on any other loans. Under the loan agreement, Defendant would receive all of the Practice’s future accounts and payments from its clients, and a grant of a security interest in its property.

Two weeks later, the Practice asked Defendant to reduce the amount of its daily debits. One of Defendant’s representatives concluded that the Practice was overfunded, and Defendant temporarily reduced the debits. Subsequently, the Practice stopped paying both parties. Eventually, Defendant was repaid in full and the Practice and Plaintiff came to a settlement.

Analysis: 

Plaintiff sought relief under two theories: tortious interference of the loan agreement and interference of Plaintiff’s rights as a senior secured lender under Maryland UCC Section 9-625. Defendant moved for summary judgment, which the Court denied because the issues could not be resolved as a matter of law. The summary judgement standard requires the Court to enter judgement where there is no genuine dispute as to any material fact and a party is entitled to judgment under matter of law.

Tortious interference with contract has five elements; one is intentional interference. “Intentional interference” requires intentionality, interference, and impropriety. The intentionality issue hinged on several facts, including the receipt of the Notice Letter, the filing of the UCC-1 Financing Statement, and the information known to Defendant through the application process.  Next, purposeful conduct, however subtle, may be enough to constitute inducement. Furthermore, if a fact-finder determined that Defendant interfered with the contract, this determination may suffice to show that the interference was improper. Thus, these issues were matters of fact rather than of law. 

As for damages, Plaintiff claimed that Defendant’s funding caused the Practice to breach its loan agreement because it was unable to sustain the volume of debits. Defendant argued that its infusion of funds actually allowed the Practice to make some repayments to Plaintiff. Both positions had support in the record; thus, summary judgement was inappropriate. 

As for the UCC claim, Section 9-625(b) states that a “transferee of funds from a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party.” Defendant is a transferee of the collateral shared with Plaintiff. Its rights to the collateral depend on whether it colluded with the practice. A comment to another UCC section defines the term “collusion” to include a scenario where one party knows that the other’s conduct constitutes a breach and gives substantial assistance or encouragement to the other. This is a question for the fact-finder. 

The opinion is available in PDF here.

Greenspring Quarry Assoc., Inc. v. Beazer Homes Corp. (U.S.D.C.)

Filed:  June 26, 2017

Opinion by:  James K. Bredar

Holding:  Where (1) a principal exerts control over a corporation’s board via a majority acting within the principal’s scope of employment, (2) the board takes actions in breach of contract and in contravention of principal’s express statements, and (3) sufficient privity exists to survive a challenge based on economic loss doctrine, well-pleaded allegations of fraudulent misrepresentation against the principal are sufficient to survive a motion to dismiss for failure to state a claim.

Facts:  Plaintiffs (“Owners”) are members of master and subordinate property owners’ associations in a mixed residential and commercial development.  Defendant (“Developer”) is the developer of the relevant properties.

Development began in 2005, and Developer incorporated master and subordinate owners’ associations one year later.  Soon thereafter, Developer caused its employees to occupy the initial positions on both associations’ boards.  Developer filed on behalf of each association similar covenants under which a management company would maintain common areas, with Developer to pay costs until such time as it transferred title to the common area property to the associations.  Developer began billing Owners in 2008 but did not transfer title to the common areas until December 2015.

Owners, as members of the master and subordinate associations, brought separate but practically identical actions alleging breach of contract, negligent misrepresentation, and fraudulent misrepresentation.  Developer removed both actions under diversity jurisdiction and moved to dismiss the tort claims for failure to state a claim.  Removal was granted, and both actions were joined for convenience and efficiency.

Analysis:  Developer first argued that Owners’ allegations sounded only in contract.  The court began by noting that under the doctrine of respondeat superior, because Developer’s employees joined the boards under its direction and in furtherance of its objectives, Developer would be vicariously liable for any tortious acts committed by the board.  By extension, because board members of Maryland non-stock corporations owe the same fiduciary obligations as any other Maryland corporation, breach of duty accompanying a contractual obligation would be sufficient to support a tort claim.  So finding, the court permitted Owners’ tort claims.

Developer next argued that the economic loss doctrine barred any tort claims, such that its alleged negligence causing purely economic harms ought not create tort liability in the absence of privity, actual physical injury, or risk thereof.  However, noting that Maryland has traditionally permitted tort actions for purely economic losses in the context of fraud, and finding more than sufficient allegation of privity between the parties via the intimate nexus between Owners and the associations, and Developer’s control of the boards, the court deemed risk of tort liability reasonably foreseeable.

Third, Developer argued that Owners’ reliance on Developer’s allegedly negligent or fraudulent statements was unreasonable.  Avoiding the factual question of whether reliance was reasonable, the court evaluated the board’s alleged conduct under the adverse domination doctrine, where knowledge or actions of an agent whose interests are adverse to the principal cannot be imputed to the principal.  Because corporate entities act through agents who wouldn’t rationally be expected to communicate their own wrongdoing to the principal, equitable considerations lean in favor of the corporation and create a rebuttable presumption.  Here, a cause of action against the board (and vicariously, Developer) would not accrue if a disinterested majority board could be proven.  In the court’s view, Developer had not alleged sufficient facts to show that the boards contained a disinterested majority during the time period at issue.

Lastly, Developer argued that Owners’ claims failed to meet FRCP Rule 9(b)’s particularity requirements that time, place, and contents of allegedly fraudulent statements and the person making such statements be pled with sufficiency.  Finding the complaint to contain sufficiently complete allegations (an accounting of dated bills approved by the boards while under Developer’s control, with identities of the board members responsible), the court found Owners to have met their Rule 9(b) burden.

Accordingly, the court found Owners to have survived Developer’s motions to dismiss.

The full opinion is available in PDF.

Gregg Lapointe v. SIGMA TAU Pharmaceuticals, Inc.

Filed: September 11, 2013 

Opinion by Michael D. Mason 

Holdings:  (1) A parent corporation is allowed to interfere with the subsidiary's contracts without liability under the "unity of interest" doctrine.  This privilege is not absolute, however.  It does not exist if the parent acts contrary to the interests of the subsidiary or interferes with a contract with a third party by use of wrongful means.  The burden of establishing a privilege lies with the complaining party. 

(2) If a privilege is found, it would extend to a shareholder with a controlling interest in the parent corporation. 

Facts:  Plaintiffs, former employees of corporate defendant's wholly owned subsidiary, alleged that the corporate defendant and its largest shareholder (also an individually named defendant) tortuously interfered with plaintiffs' long-benefit plan causing a refusal to pay benefits to which plaintiffs were entitled.  

Defendants filed motion to dismiss arguing that even assuming wrongful interference, no liability exists when a parent interferes in a contract between its wholly owned subsidiary and a third party because there is a "unity of interest" between the parent and its subsidiary.  The largest shareholder of the parent also claimed benefit to this doctrine.


Analysis:  Although Maryland courts have discussed the issue of whether the unity of interest doctrine applies to tortious interference claims involving a parent corporation and its wholly owned subsidiary, they have not adopted it.  In Copperweld Corp. v. Independence Tube Corp., the U.S. Supreme Court held that a parent corporation could not be prosecuted for an antitrust violation involving its subsidiary because a parent and its wholly owned subsidiary have a complete unity of interest. 

However, as the principle relates to a parent corporation’s liability for tortious interference with the contractual agreement of its subsidiaries, most courts that have adopted the doctrine have done so with limitations.  In Waste Conversion Sys., Inc. v. Greenstone Indus., Inc., 33 S.W.3d 779, 781 (Tenn. 2000), the Supreme Court of Tennessee held that a parent could lose its privilege if (1) acting contrary to its wholly-owned subsidiary’s economic interests the parent can be considered a third party to its subsidiary's contractual relationship and can be held for tortuously interfering with that relationship; and (2) it employs wrongful means even if the parent does not act contrary to the subsidiary's best interest.  Wrongful means is defined to include misrepresentation of facts, fraud, threats, intimidation, as well as a number of other acts, including any other wrongful act recognized by statute or common law.  The burden of proof lies with the plaintiff.

The full opinion is available in PDF.

Doris Mitchell v. WSG Bay Hills IV, LLC (Maryland U.S.D.C.)

Filed December 11, 2013

Opinion by Judge Richard D. Bennett

Holding: A business operator does not have implied duty to protect the public from lawful actions of third parties partaking in the business’ activities.

Facts: Plaintiff was struck in the leg by a golf ball while living in a condominium adjacent to a golf course owned by the Defendant. Prior to this incident, occupants of the condominium complained to the Defendant after errant shots damaged the building. The Defendant elected not to alter the course because of costs. The Defendant moved for summary judgment arguing  it did not have a duty to protect the condominium residents.

Analysis: A business is not required to control the actions of third-parties lawfully partaking in business, unless a “special relationship” exists between the business and the injured party. In most instances a special relationship is created by either statute or contract. However, the Court acknowledged that a special relationship may be implied by either “(1) the inherent nature of the relationship between the parties; or (2) by one party undertaking to protect or assist the other party, and thus often inducing reliance upon the conduct of the acting party.” The Defendant did not have a direct relationship with the Plaintiff and the Defendants never offered to protect the condominium residents.

The Court granted the motion for summary judgment.

 

The full opinion is available in PDF.

Dean v. Beckley (Maryland U.S.D.C.)

Filed: October 1, 2010.

Opinion by Judge Catherine C. Blake.

Held: Allegations that Defendant failed to disclose to purchaser of an RV before selling a warranty that RV manufacturer had declared bankruptcy when questions were raised regarding the nature of the warranty is sufficient to deny a motion to dismiss a claim alleging fraud in the inducement.

Facts: Plaintiff made a down payment to purchase a new RV from a dealer. Before closing on the sale, the manufacturer of the RV filed for bankruptcy. Eight days later, Plaintiff and employees of the dealer discussed a limited warranty while conducting a walk-through of the RV. None of the employees informed the Plaintiff of the bankruptcy. Plaintiff purchased a seven-year warranty on the RV. Plaintiff soon discovered numerous problems with the RV allegedly covered by the warranty. In subsequent conversations, the dealer allegedly agreed to accept return of the RV and refund Plaintiff's money. Ultimately, the dealer refused both the return and the refund.

Plaintiff sued the dealer and the individual employee that discussed the warranty with the Plaintiff, alleging fraud in the inducement among other things. Defendants moved to dismiss.

Analysis: Under Maryland law, corporate officers are personally liable for the torts they personally commit. Plaintiff's allegations that the individual employee personally explained in detail the nature of the warranties they would receive, while knowing the manufacturer had filed bankruptcy, coupled with the allegation that the bankruptcy was a material fact within the "unique possession" of the Defendants is sufficient to permit the fraud claim to proceed against the individual.

The Court found allegations of false representations regarding (i) the quality of the RV itself and (ii) the acceptance of the RV's return and subsequent refund of Plaintiffs money to be insufficient as the representations concerning the quality of the RV were puffery and the alleged promise to accept a return was promissory in nature. However, Plaintiff made sufficient allegations regarding failure to disclose and fraudulent concealment of the manufacturer's financial troubles to deny the motion to dismiss.

"Generally, the failure to disclose does not amount to a false representation unless there is a separate duty to disclose." In transactions conducted at arm's length, such as here, a duty may arise if the fact is material, the concealer has superior knowledge and knows the other is acting on the assumption the fact does not exist. Here, Plaintiff alleged the specific inquiries regarding the warranty gave Defendants knowledge that Plaintiffs assumed the manufacturer would be able to honor the warranty."

The full opinion is available in pdf.

McKinney v. Fulton Bank (Maryland U.S.D.C.)

Filed: June 21, 2010
Opinion by Judge Catherine C. Blake.

Held: A contract alone does not create a tort duty owed by a Bank to a Borrower in a loan transaction unless the Borrower is a vulnerable party or other special circumstances exist.

Facts: A borrower applied for a $930,000 loan to build a second home but entered into a $997,000 loan with a bank on April 27, 2006. The borrower claimed the bank "violated several federal and state laws by failing to make certain disclosures and issue documents on time" and the bank forced her to refinance a $67,000 second mortgage on her principal residence by unilaterally increasing the loan.

The borrower also claimed the deed of trust on her primary home granted her a three-day right to cancel the loan transaction and because she was not informed of this right she had an extended right to cancel. The borrower alleged this right was exercised by rescission letters sent on April 6, 2009 to the bank's counsel and president voiding any security interest of the bank. The bank foreclosed on the second home. The borrower claimed damages relating to costs of the loan and improvements made to the second home.

Analysis: The Court dismissed a majority of the claims alleging violations of the Truth in Lending Act, the Real Estate Settlement Procedures Act and the Maryland Consumer Protection Act due to expiration of the statute of limitations, the lack of a private cause of action under the statute and the borrower's failure to meet the heightened pleading standards.

The borrower also brought a negligence claim. While "the Maryland Court of Appeals has found that a bank did owe a consumer a duty of care in a loan transaction" in Jacques v. First Nat'l Bank of Md., 515 A.2d 756 (Md. 1986), the finding arose from more than just the contract. A contractual duty does not by itself become a tort duty. A duty must be imposed by law independent of the contract. "The Fourth Circuit has interpreted the holding of Jacques as limited to circumstances involving a vulnerable party." As the court neither found an independent duty nor considered the borrower to be vulnerable, the negligence claim was also dismissed.

The full opinion is available in pdf.

Brass Metal Products, Inc. v. E-J Enterprises, Inc. (Ct. of Special Appeals)

Filed: November 30, 2009
Opinion by Judge Kathryn Grill Graeff

Held: To establish a claim for conversion, the plaintiff must first demonstrate that he or she had a property interest in property that was allegedly converted. Where the Defendant E-J Enterprises, Inc., ordered and paid for aluminum railings to store for Plaintiff Brass Metal Products, Inc., until Brass Metal requested delivery, E-J owned the railings until it sold them to Brass Metal. When E-J sold the railings to another company, it may have violated the business agreement between the parties, but its actions did not constitute conversion. The claim that E-J converted Brass Metal’s interest in the designs of the aluminum railings asserts intangible property rights. Conversion claims for intangible property rights are limited to situations where the intangible property rights are merged into a document that has been transferred. Where no such showing was made, the conversion claim failed.

Brass Metal alleged that, based on custom and usage, E-J converted the unpatented design of its railings. Brass Metal cites no case holding that custom and usage in an industry can create property rights that give rise to a conversion claim. Even if custom and usage could create property rights, Brass Metal failed to present sufficient evidence to establish that there was a uniform, definite, and well-established custom in the aluminum extrusion industry that a person who creates a die possesses a property right in the shapes created from the die.

Brass Metal failed to produce sufficient evidence to create a jury question regarding whether a confidential relationship existed between the parties, such that E-J had a duty to disclose its business dealings with Brass Metal’s competitor. Where two businesses are engaged in an “arms-length” transaction to further their own separate business objectives, a confidential relationship does not exist. E-J did not exercise the type of dominion and influence over Brass Metal that would establish a confidential relationship.

Facts: E-J, a wholesale metal distributor, entered into an agreement with Brass Metal to provide “just-in-time” inventory services, which entailed purchasing aluminum railings directly from aluminum extrusion mills, storing these railings, and selling them to Brass Metal as needed. The railings were designed by Brass Metal’s owner and President, James Burger, but Burger did not patent his railing designs.

In April 2006, E-J sold railings that were being held for Brass Metal to another company, Parthenon Installations. Thomas Martin, a Brass Metal salesman, owned a majority interest in Parthenon. In July 2006, when Burger discovered that Parthenon had established a manufacturing facility that was a “duplicate” of his facility, he fired Martin. Burger then requested that E-J stop selling railings based on Burger’s design to Parthenon. E-J declined Burger’s request and this lawsuit followed. Prior to trial, Brass Metal settled claims that it had brought against Parthenon, Martin, and Anastasios Pantoulis, another partner in Parthenon.

Analysis: At the outset of the opinion, the Court stated that:

Our review of the record, in the light most favorable to Brass Metal, reflects the following: (1) Brass Metal and E-J Enterprises entered into an agreement whereby E-J Enterprises would purchase railings from an aluminum extrusion mill and then supply the railings to Brass Metal as needed; (2) Brass Metal contacted mills and gave authority for E-J Enterprises to order railings from Brass Metal’s dies; and (3) Brass Metal may have given E-J Enterprises drawings of its designs to enable E-J Enterprises to order additional dies. Brass Metal points to no place in the record that supports its assertion that it gave E-J Enterprises dies, metallurgical formulas, trade secrets, or other confidential information.

As to Brass Metal's claim of conversion of its die designs, the Court found that Brass Metal did not obtain a property interest in the shapes and designs by custom and usage because custom and usage in an industry cannot create property rights that give rise to a conversion claim. Moreover, there would have had to be proof that the alleged custom and usage was “definite, uniform, well established, and so general that knowledge of it may be presumed . . . .” There was no such proof in this case.

As to the claim of conversion with respect to the aluminum railings, the evidence at trial established that E-J purchased aluminum railings from the mill, and it stored the railings until Brass Metal requested a delivery. Once the railings were delivered, Brass Metal was obligated to pay E-J within 30 days. Although selling the railings to other people may, or may not, have been contrary to the agreement between the parties, it did not constitute conversion.

As to Burger's claim of conversion of its dies, the Court found that Brass Metal failed to prove that E-J deprived Brass Metal's owner, the owner of the dies, possession of the dies.

With regard to various specific contracts and business relationships, the Court found that Brass Metal failed to adduce proof as to a number of the elements of tortious interference with contract.

As to the claim for deceptive concealment, the Court found that there was no confidential relationship between Brass Metal and E-J, since "[w]here businesses are engaged in an 'arm’s length' transaction, a confidential relationship does not exist."

Brass Metals also raised various evidentiary challenges, all of which were rejected by the appellate court.

Practice Pointers: Brass Metals could have avoided the problems it faced had it entered into appropriate agreements with E-J and its employees, such as Martin, and others, such as Pantheon, restricting their right to compete.

A copy of the opinion is available in PDF.

Glynn v. EDO Corp. (Maryland U.S.D.C.)

Opinion by Judge J. Frederick Motz
Filed July 23, 2009

Facts: Glynn sold assets of his company to EDO and signed a non-disclosure and confidentiality agreement and restrictive covenants. He went to work for EDO and worked with one James Martin. EDO ultimately discharged both Glynn and Martin who formed companies that began to compete against EDO.

Glynn brought this action against EDO alleging retaliation in violation of the False Claims Act, 31 U.S.C. § 3730 et seq., and wrongful termination. EDO filed counterclaims against Glynn and his wholly-owned LLC asserting numerous state law causes of action arising from Glynn’s alleged actions during and after his employment with EDO's corporate predecessor, including breach of contract, breach of fiduciary duty, misappropriation of trade secrets, conversion, defamation, tortious interference with advantageous relations, unjust enrichment, and civil conspiracy. While styled as a "cross-claim," EDO asserted similar claims against Martin.

Martin was not a resident of Maryland. He was served while in Maryland to file, pro se, a request for an extension of time to challenge EDO's assertion of the Court's ability to exercise personal jurisdiction over him.

Held:

1. Claim for conversion based upon alleged conversion “proprietary documents, employee information, technology design and schematics, contact lists, vendor and pricing information, and other trade secrets and non-trade secret proprietary and confidential information” are based on the misappropriation of EDO's information. Hence, such claims are subject to dismissal because such claims are preempted by the New Hampshire Uniform Trade Secrets Act (“NHUTSA”). Claims for conversion of physical property such as a desk or a chair is not preempted.

2. A claim for conversion by spending company time on matters for the company's competitors is also subject to dismissal because an employee's conduct on company time is not in the nature of a property or right which may be the subject of conversion.

3. EDO asserted that the alleged wrongful acts of Glynn and his company allowed them to “gain a head start” in developing and producing products, resulted in benefits such as profits, earnings, patent royalties, and commissions. Thus, EDO made a claim for unjust enrichment. Judge Motz denied the motion to dismiss of the unjust enrichment claim, holding that it was “premised on wrongdoing over and above” the misappropriation or misuse of EDO's information.

4. The Court denied the motion to dismiss claims of civil conspiracy because the allegations that Glynn et al. agreed and conspired to “misappropriate, defraud, and convert [EDO]’s proprietary and confidential information and trade secrets” and “unlawfully commit unfair competition and interference with [EDO]'s contractual and prospective business relationships” was sufficient to state a claim “where the elements of the claim require[d] some allegation or factual showing in addition to that which [formed] the basis for [the] claim of misappropriation of a trade secret.”

5. As to Martin, there were insufficient facts upon which to assert either general or long-arm jurisdiction. Martin's appearance in Maryland to request an extension of time to raise the jurisdictional defense does not constitute an implied waiver of the defense.

The opinion has been recommended for publication and the full opinion is available in PDF.