Stricken Permissive Counter Claims Not Barred by Doctrine of Res Judicata under Summers v. Beltway Builders, Inc. (App. Ct. of Md.)

 

Filed: February 7, 2023

Opinion by: Friedman, J.

Holding: A dismissed permissive counter-claim cannot be barred by the doctrine of res judicata when subsequently filed by the former defendant in a subsequent lawsuit against the former plaintiff.

Facts: The dispute originated when homeowners James Summers and Dr. Steven Snyder contracted Beltway Builders, Inc. for home remodeling. A disagreement arose over the performance, leading Beltway to sue for breach of contract and unjust enrichment, while the homeowners filed a late counterclaim for breach of contract. Beltway then filed a motion to strike the counterclaim. The homeowners, therefore, filed the instant, separate suit against Beltway. The homeowners prevailed in the original lawsuit filed by Beltway, and Beltway defended the subsequent lawsuit on the grounds of res judicata.

Analysis: The doctrine of res judicata bars re-litigating civil claims after such claims have had their day in court and a final judgment on the merits has been entered by the court. Under Maryland law, the elements of res judicata are: (1) that the parties in the present litigation are the same or are in privity with the parties to the earlier litigation; (2) that the claim presented in the current action is identical to the one determined or which could have been brought in the prior litigation; and (3) that there was a final judgment on the merits in the prior litigation. Spangler v. McQuitty, 449 Md. 33, 65 (2016). Under Rowland, however, courts will not find that a party's claims are barred by res judicata when that party still has the right to bring them as an independent suit. Rowland, 320 Md. at 232-33.

The circuit court had dismissed the homeowners' separate lawsuit, filed later, based on the doctrine of res judicata, deciding that the homeowners should have initially brought their claims as counterclaims in Beltway's lawsuit. However, the Appellate Court held that under Maryland Rule 2-331(a), counterclaims are permissive, not mandatory. Citing Rowland v. Harrison and other sources, the court underscored that Maryland law does not force defending parties into a 'use it or lose it' situation regarding counterclaims.

Consequently, the appellate court found that the lower court's dismissal based on res judicata was erroneous, as it conflicted with the flexible nature of Maryland’s counterclaim rules. The judgment was reversed, and the case was remanded.

For the full opinion, please refer to the PDF document linked here.

 

Tim Faith is a practicing business law and estates planning attorney, and also an associate professor at The Community College of Baltimore County, where he teaches business law, legal writing, and torts.

 

Tim also serves as the chair of the Maryland Business Law Developments blog, a service of the Business Law Section of the MSBA.

 

Connaughton v. Day (Cir. Ct. Mont. Co.)

Filed: December 9, 2019

Opinion by: Judge Anne K. Albright

Holding: Plaintiffs alleging securities fraud were denied class certification because, despite demonstrating commonality of questions of law and fact, they failed to show that joinder of approximately 35 putative claimants was impracticable or that their claims were typical or their representation adequate, given the variety in the source, nature of and reliance on information received by the plaintiffs and putative class members.

Facts: The four Original Defendants were individuals and entities accused of procuring investors for a Ponzi scheme run by three non-parties, the MLJ Group. The second amended complaint named 14 New Defendants and additional related claims.

Plaintiff’s Amended Motion for Class Certification requested certification of a class of all persons who invested in securities, in the form of promissory notes, by lending money to borrowers of the MLJ Group. The requested class excluded individuals who profited off the Ponzi scheme and those affiliated with any Defendant.

The Amended Motion was served via counsel on the Original Defendants, but there were no Affidavits of Service for the New Defendants. The Original Defendants responded to the Amended Motion and participated in prior discovery; the New Defendants did not do either.

Analysis: The Court held that the Amended Motion did not meet the threshold requirements of Maryland Rule 2-231(b). As to the first numerosity requirement, the Court accepted an Original Defendant’s estimate that the putative class would be made up of 35 members, and the Plaintiffs provided only conclusory arguments for why joinder would be impracticable. As to second requirement of commonality, the Court was satisfied that Plaintiffs identified seven common questions of law and fact.  

As for the third typicality requirement, some Plaintiffs were contacted regarding the transaction by a non-party accountant rather than a Defendant. Other putative class members contacted by the Defendants themselves did not receive scripted, uniform information. The variety in the sources of information, the information received, and the reliance on the information makes the Plaintiffs’ claims less typical.

As for the fourth adequacy requirement, because the Plaintiffs may have relied on statements of the non-party accountant rather than a Defendant, the named Plaintiffs cannot adequately represent the putative class. Additionally, the accountant is both a potential target of claims and putative class member. Thus, only one of the four threshold requirements of Maryland Rule 231(b) was met.

The Plaintiffs also failed to meet the requirements of Maryland Rule 2-231(c)(3). As for the predominance requirement, fraud claims are not normally susceptible to class treatment because there could be too much variety regarding the degree of reliance placed on representations. This appears to be case here given the role of the non-party accountant and the receipt of unscripted information, as discussed above. As for the superiority of class action requirement, considering the pre-set trial schedule, the fact that the New Defendants were not given a chance to address these questions, and that more time would not cure the other failings of the Amended Motion, Plaintiff’s argument fails.

Thus, Plaintiffs’ Amended Motion for Class Certification was denied.

The full opinion is available in PDF.

Under Armour, Inc. v. Battle Fashions, Inc. (Maryland U.S.D.C.)

Filed: July 18, 2019

Opinion by: Richard D. Bennett

Summary: Under Armour, Inc. (“Under Armour”) filed a lawsuit seeking, among other things, a declaration that its use of certain phrases in connection with its products does not infringe upon a registered trademark owned by defendant Kelsey Battle (“Battle”).  Battle, a resident of North Carolina, moved to dismiss the action for lack of personal jurisdiction.  After holding an evidentiary hearing, the court dismissed the action for lack of personal jurisdiction and transferred the matter to the Eastern District of North Carolina.

Analysis:  The court initially denied Battle’s motion to dismiss, holding that the requisite preliminary prima facie showing of personal jurisdiction had been made.  However, after holding a pre-trial evidentiary hearing, the court found that personal jurisdiction over Battle had not been established by the requisite preponderance of the evidence.  The court began its analysis of personal jurisdiction by noting that two conditions must be satisfied in order to exercise personal jurisdiction over a non-resident: (1) the exercise of jurisdiction must be authorized under Maryland’s long-arm statute [Md. Code Ann., Cts. & Jud. Procs. § 6-103(b)]; and (2) the exercise of jurisdiction must comport with the due process requirements of the Fourteenth Amendment of the Constitution.  As to that two-pronged analysis, the court noted that Maryland courts “have consistently held that the state’s long-arm statute is coextensive with the limits of personal jurisdiction set out by the Due Process Clause of the Constitution,” but that courts must address both prongs of the analyses.

As to the first prong of the analysis, the court noted that “a plaintiff must specifically identify a provision in the Maryland long-arm statute that authorizes jurisdiction”.  Here, Under Armour argued the existence of personal jurisdiction over Battle based on his transacting business in Maryland [Md. Code Ann., Cts. & Jud. Procs. § 6-103(b)(1)].  Noting that “Maryland courts have construed the phrase ‘transacting business’ narrowly, requiring, for example, significant negotiations or intentional advertising and selling in the forum state”, the court found that a small number of sales by Battle to Maryland consumers, two cease and desist letters sent by Battle to Under Armour in Maryland, and three letters sent by Battle to parties outside of Maryland in order to “put pressure” on Under Armour were insufficient to establish personal jurisdiction under Maryland’s long-arm statute.

As to the second prong of the personal jurisdiction analysis, the court noted that the Fourteenth Amendment requires that a defendant have certain minimum contacts with the jurisdiction “such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.”  Acknowledging that there was no basis to assert “general” or “all-purpose” jurisdiction over Battle, the court focused its analysis on “specific” jurisdiction, which requires that the action “arise out of or relate to the defendant’s contracts with the forum.”  Here, the controversy did not relate to marketing or selling infringing products in the forum but instead related to the activities of Battle in enforcing his trademark.  Accordingly, the court’s analysis focused on whether the two cease and desist letters sent to Maryland and the three letters sent to parties outside of Maryland were sufficient to establish specific jurisdiction over Battle in Maryland.  As to the letters sent to Under Armour in Maryland, the court held that “cease-and-desist letters alone are insufficient to confer specific personal jurisdiction.”  The court then noted that “enforcement activities taking place outside the forum state do not give rise to personal jurisdiction in the forum.”  Based on that premise, the court held that the three letters sent to parties outside of Maryland did not give rise to personal jurisdiction over Battle because those letters “did not threaten litigation, had no effect on Under Armour’s business, and did not result in any damage to Under Armour’s business relationships.”

The full opinion is available in PDF.

Payments IP Pty Ltd. v. B52 Media LLC (Maryland U.S.D.C.)

Filed: February 23, 2018

Opinion by: Ellen Lipton Hollander

Facts: Payments IP Pty Ltd. (“Payments IP”), an Australian company, allegedly contracted with B52 Media, LLC (“B52”), a Maryland limited liability company, and Maryland resident Lonnie Borck (“Borck”), B52’s owner (Borck and B52 being referred to collectively, as the “B52 Parties”), to purchase a web domain (the “Domain”).  Later that year, Payments IP allegedly discovered that the Domain had been placed on an “administrative freeze” by the domain registrar because the Domain was the subject of a lawsuit pending in California state court. In the California state case, an individual resident of California, Suraj Kumar Rajwani (“Rajwani”), asserted ownership of the Domain (the “California Case”).  Payments IP successfully intervened in the California Case.  Shortly after Payments IP moved to intervene in the California Case, Payments IP filed suit in the United States District Court for the District of Maryland (the “Maryland Case”), asserting claims similar to those asserted by Payments IP in the California Case, including a claim for declaratory judgment regarding ownership of the Domain.  Motions were filed by the defendants in the Maryland Case seeking to dismiss the declaratory judgment claim against Rajwani for lack of jurisdiction and to stay the Maryland Case for so long as the California court retained jurisdiction over the California Case. 

Analysis/Holding:  The Maryland Court first addressed Rajwani’s motion to dismiss for lack of jurisdiction, pursuant to which Rajwani argued that the Court lacked both personal jurisdiction over him and in rem jurisdiction over the Domain.  As to personal jurisdiction, the Court noted that “to assert personal jurisdiction over a nonresident defendant, two conditions must be satisfied: (1) the exercise of jurisdiction must be authorized under the state’s long-arm statute [Md. Code Ann., Cts. & Jud. Procs. § 6-103(b)]; and (2) the exercise of jurisdiction must comport with the due process requirements of the Fourteenth Amendment.”  Regarding the interaction between those two conditions, the Court noted that “the reach of the long arm statute is coextensive with the limits of personal jurisdiction delineated under the due process clause of the Federal Constitution, [and thus] our statutory inquiry merges with our constitutional examination.”  The Court ultimately denied Rajwani’s motion to dismiss for lack of personal jurisdiction, holding that, based on the pleadings and papers filed in the Maryland Case, Payments IP made a prima facie showing of personal jurisdiction because:

 (i) over the course of seven years, Rajwani engaged in extensive negotiations with the B52 Parties (who were domiciled in Maryland) with respect to the Domain;

(ii) Rajwani transferred money to B52 on four occasions, totaling approximately $600,000;

(iii) Rajwani visited Maryland on one occasion in 2015 to meet with Borck in connection with the negotiations over the Domain dispute; and

(iv) Rajwani filed a claim with the Register of Wills in Maryland against the estate of Borck predicated on the underlying transaction involving the Domain. 

However, in light of the procedural posture of the Maryland Case (i.e., early in the proceedings, without having conducted any discovery or any evidentiary hearing on the issue of personal jurisdiction), the Court held that Payments IP must ultimately prove the existence of personal jurisdiction by a preponderance of the evidence.

The Court then addressed Rajwani’s request that the Court abstain from jurisdiction under the so-called “Brillhart/Wilton” doctrine, which allows federal district courts to decline jurisdiction over declaratory judgment actions in certain circumstances; namely, if abstention would save judicial resources.  The Court denied Rajwani’s request because Rajwani sought non-declaratory relief that was so closely related to his declaratory judgment claim that abstaining from jurisdiction as to that claim would not save any judicial resources.

Next, the Court addressed Rajwani’s request for dismissal based on the so-called “Princess Lida” doctrine, which provides that “a federal court may not exercise jurisdiction when granting the relief sought would require the court to control a particular property or res over which another court already has jurisdiction.”  According to Rajwani, the Maryland Case was subject to dismissal because the declaratory judgment claim was an in rem proceeding vis-à-vis the Domain, which was already subject to the in rem or quasi in rem jurisdiction of the California court in the quiet title action.  In the Maryland Case, Payments IP sought declaratory relief against, not only Rajwani and the B52 Parties but also, “all other claimants, known and unknown”; the Court reasoned that, because it did not possess personal jurisdiction over “all other” possible claimants, it must, therefore, obtain in rem jurisdiction over the Domain in order to grant the relief sought by Payments IP.  Based on the fact that the California court had exercised jurisdiction over the Domain prior to the filing of the Maryland Case, and the fact that no one disputed the California court’s jurisdiction, the Court held that, pursuant to the Princess Lida doctrine, the Court did not have in rem jurisdiction over the Domain.  However, rather than dismissing the claim as requested by Rajwani, the Court stayed the claim, because, according to the Court, “the Princess Lida doctrine is one of abstention, rather than subject matter jurisdiction….  Thus, if the Princess Lida doctrine is implicated, this Court should dismiss or stay the declaratory judgment claim, but it does not lack subject matter jurisdiction.”

Lastly, the Court addressed the motions of Rajwani and the B52 Parties to stay the Maryland Case, pending resolution of the California Case, on the basis of so-called “Colorado River” abstention, which provides that a federal district court may, in “exceptional circumstances,” stay federal litigation that is parallel to a state suit.  Specifically, if there exists parallel litigation involving substantially the same parties and substantially the same issues (such that the state action will resolve every claim at issue in the federal action), then a stay of the federal case may be appropriate based upon a balancing of the following six factors:

“(1) whether the subject matter of the litigation involves property where the first court may assume in rem jurisdiction to the exclusion of others;

(2) whether the federal forum is an inconvenient one;

(3) the desirability of avoiding piecemeal litigation;

(4) the relevant order in which the courts obtained jurisdiction and the progress achieved in each action;

(5) whether state law or federal law provides the rule of decision on the merits; and

(6) the adequacy of the state proceeding to protect the parties’ rights.” 

Applying that analysis, the Court first held that the Maryland Case and the California Case were parallel actions because:

(a) the parties were the same in both actions;

(b) both actions concerned the same basic issue (ownership of the Domain) and transactions (the contract to buy the Domain); and

(c) the relief sought by Payments IP in the Maryland Case was “virtually identical to the relief Payments IP seeks as an intervenor in the California case.” 

The Court then held that a stay of the Maryland Case was appropriate based on a balancing of the aforesaid factors because:

(1) the California court had assumed in rem jurisdiction over the Domain (weighing in favor of abstention);

(2) the California and Maryland courts were equally convenient to Payments IP  and any minimal convenience difference as between the other parties was mitigated by the fact that, if the Maryland Case were not stayed, the parties would likely be required to litigate in both forums (either neutral or weighing in favor of abstention);

(3) it was desirable to avoid piecemeal litigation (weighing in favor of abstention);

(4) the California court obtained jurisdiction before the Maryland Court and significantly more progress had been made in the California Case than in the Maryland Case (weighing in favor of abstention);

(5) jurisdiction of the Maryland Case was based on diversity of the parties and there were no federal questions at issue (either neutral or weighing in favor of abstention); and

(6) the California Case was adequate to protect the rights of Payments IP, as evidenced by Payments IP’s decision to intervene in that action before filing the Maryland Case, as well as the progress made in that action (either neutral or weighing in favor of abstention).

The full opinion is available in PDF.

Charles A. Peterson v. Evapco, Inc. (Ct. of Special Appeals)

Filed: July 5, 2018

Opinion by: Andrea M. Leahy

Holding: Pursuant to the “closely-related” doctrine adopted from other federal and state jurisdictions, a forum-selection clause in a Confidentiality Agreement may be used to assert personal jurisdiction over non-resident, non-signatories where the clause itself was valid; the claims arose out of the non-signatories’ status in relation to the Agreement; and the non-signatories were so closely related to the contract such that it was foreseeable for them to be haled into the forum court.

Facts: Appellees purchased a North Carolina cooling tower products company (the “Company”) from two spouses who are non-residents of Maryland (“Appellant Husband” and “Appellant Wife,” respectively). As part of the stock purchase agreement, Appellant Husband signed a Confidentiality Agreement that contained a non-compete clause and a forum-selection clause designating Maryland. Appellant Husband remained an employee of the Company until his termination for the conduct that forms the basis of the underlying lawsuit.

Appellees claimed that Appellant Husband had, individually and through two companies (the “Appellant Companies”) sold cooling tower products to Appellees’ customers. Appellant Companies are wholly owned by Appellants and were organized in North Carolina and Georgia, respectively. Appellees sued for breach of the Confidentiality Agreement and tortious interference of contractual relations, among other counts. Appellant Wife and Appellant Companies filed a joint motion to dismiss for lack of personal jurisdiction. The Circuit Court for Carroll County denied the motion.

Analysis:  Appellant Wife argued that she did not consent to jurisdiction in Maryland and did not execute the Confidentiality Agreement, and even if she had, it had expired. Appellant Companies argued that they had no contact with Maryland. Appellees initially argued that Appellant Wife transacted business in Maryland by signing the stock purchase agreement, which was governed by Maryland law, and that Appellant Wife and Appellant Companies are affiliates and alter egos of Appellant Husband. On appeal, Appellees argued that no analysis under the long-arm statute or due process was necessary.

On appeal, Appellees argued that the court could assert personal jurisdiction under the “closely-related” doctrine, which holds that a non-signatory to a contract may be bound by the forum-selection clause if the non-signatory is so closely related to a dispute that it would be foreseeable that it would be bound. The Court held that the doctrine applies to non-signatory, non-residents in the context of motions to dismiss for lack of personal jurisdiction, citing case law from various jurisdictions.

The Court adopted the three-prong test articulated in Carlyle Inv. Mgmt. LLC v. Moonmouth Co. SA, 779 F.3d 214 (3d Cir. 2015). The Carlyle Court had analyzed the application of the doctrine in the context of non-signatory defendants’ motions to dismiss for lack of personal jurisdiction in several Delaware cases. Carlyle held that a defendant who had not signed a subscription agreement was nonetheless bound by its forum selection cause because several of the agreement’s provisions explicitly referenced the close relationship among the various, inter-connected defendant entities. Likewise, the various non-signatory entities on the plaintiff’s side could enforce the clause because they were affiliates. Also, but for the original subscription agreement that contained the forum selection clause, the disputes at issue—concerning, in part, subsequent release agreements—would not have arisen.

Applying the Carlyle test, the Court held: (1) that the forum selection clause was valid; (2) that Appellees’ claims arose out of Appellant Wife’s and Appellant Companies’ status in relation to the Confidentiality Agreement; and (3) that Appellant Wife and Appellant Company were closely related to the contractual relationship so that it would be foreseeable that they would be bound. To determine the third question, the Court examined the non-signatory’s ownership of the signatory, its involvement in negotiations, the relationship between them, and whether or not the non-signatory received a direct benefit from the Confidentiality Agreement.

As for Appellant Wife, her husband’s execution of the Confidentiality Agreement was consideration for the sale of the Company, and the entire case is premised on his conduct—in concert with her and the Appellant Companies—that purportedly violated the Confidentiality Agreement. She was a signatory of the stock purchase agreement, which explicitly referenced the Confidentiality Agreement. Also, through her ownership of Appellant Companies, she directly, financially benefitted from her husband’s conduct.

As for Appellant Companies, Appellant Husband was a co-owner and an officer of both; he was the registered agent of one; the principal places of business were the home address; he had signed checks and tax forms on their behalf; and records confirmed that he had conducted business on their behalf. Appellant Companies had derived a benefit, as they had conducted business with Appellees’ suppliers and competitors. Appellant Husband alone involved the Appellant Companies in the situation at issue. To ignore this would allow Appellant Husband to evade the forum-selection clause and undermine the Confidentiality Agreement. Thus, the Court affirmed.

The opinion is available in PDF here.

Kunda v. Morse (Ct. of Spec. Appeals)

Filed: August 31, 2016

Opinion By: Reed

Holding: The procedural rule requiring a plaintiff to plead their damages with particularity, having been amended during the course of the litigation, does not require the plaintiff awarded more damages than pled to accept the lesser amount to avoid reversal on appeal.

Facts: The parties had entered into a purchase agreement for a business operated by the Defendant, Kunda, requiring the Plaintiffs to pay a total of $846,950, with a portion bank-financed and the remainder owner-financed.  After entering into the agreement, the parties amended the agreement to alter the payment schedule.  The Plaintiffs paid $200,000 to Kunda, but then failed to timely make certain payments due to Kunda, but not before the period to cure the failure had run.  Kunda, however, re-entered the property and evicted the Plaintiffs, and essentially took back over operations of the store.  The Plaintiffs responded with a lawsuit, alleging breach of contract, and seeking damages in the amount of $102,600.

At trial, the Plaintiffs won a verdict of $200,000, but did not amend their complaint to conform to the verdict.  The defendant did not file a motion to reduce the judgment to the amount of the complaint, but instead appealed the enrolled judgment.

Analysis: The Court first reviewed the contract claims of the parties.  The Court determined that the trial court did not err in finding that Kunda, rather than the Plaintiffs, was in breach of the agreement among the parties, based on the factual findings of the trial court that the Plaintiffs still had time to cure the failure to make timely payments, and therefore Kunda breached by evicting them and taking over the operation of the business.

The Court then had to address the other issue raised by Kunda, namely that the judgment entered in the Plaintiffs' favor exceeded the amount demanded in their Complaint.  The Complaint's damage amount was calculated based on the amount of inventory alleged to have been wrongfully taken by Kunda at the eviction, however, the judgment entered in the Plaintiffs' favor was based on the Plaintiffs' demand that Kunda refund the $200,000 previously paid by the Plaintiffs prior to the breach of the contract.

At the time that the Plaintiffs filed their action, the predecessor rule for pleading damages was in force.  Prior Rule 2-305 provided that a plaintiff was required to demand specific damages, in order to put a defendant on notice of the amount of the claim.  In the event that the amount of damages proven at trial did not correspond to the complaint, a plaintiff was required to amend their complaint promptly after judgment was entered on the docket.  A defendant was also permitted to move to reduce a judgment to the amount in the complaint if a plaintiff failed to properly amend a complaint to conform with a higher award.

However, the Maryland Rules were amended in 2012.  Among the changes was a change to Rule 2-305, which provided that a plaintiff whose damages exceeded $75,000 would simply so indicate, and if less, plead the specific amount for purposes of determining appropriate state trial court jurisdiction.  The issue for the Court was whether the new or prior Rule applied in the present case, as judgment in the case was entered in 2014.  The Court concluded that parties have no vested interest in procedural rules, and that justice was served in applying the current pleading requirement under Rule 2-305.

Therefore, because neither party had made post-judgment motions to adjust the complaint or judgment, the Court affirmed the judgment amount entered by the trial court, reasoning that the amount of damages was in fact supported by evidence adduced at trial, irrespective of the amount of damages specified in the Complaint.

The full opinion is available in PDF.