Moore v. Donegal (Ct. of Special Appeals)

Filed: September 30, 2020

Opinion by: J. Graeff

Holding: Whether a settlement offer was accepted within a reasonable period of time is a question of fact rather than law. 

Facts: In the course of litigating a negligence claim, the Appellee’s insurance adjuster offered to pay the Appellant a sum of $18,000. This offer was made prior to trial. During trial, Appellant made a $21,000 counter offer, which was declined and the original offer was reiterated. The trial continued and Appellant communicated acceptance of the $18,000 to opposing counsel during a recess. The Appellee’s insurance adjuster stated that the offer was no longer available. The jury trial ended and returned a verdict for the defendant. 

Appellant filed a suit for breach of a settlement agreement and a motion for summary judgement that it was undisputed that a contract had been formed. Appellee filed a motion for summary judgment that it was undisputed that a breach of contract did not occur. The circuit court denied Appellant’s motion and granted Appellee’s motion. The question before the Court was whether the circuit court had erred in doing so. 

Analysis:

The Court held that the circuit erred in granting Appellee’s motion based on its finding, as a matter of law, that the offer had lapsed. The circuit court had found that the offer lapsed after a reasonable amount of time, which not only considers the passing minutes or hours, but also the broader context. Here, the trial had advanced to a different procedural posture from the time of offer to the attempted acceptance. Thus, the offer had lapsed.

The Court held that this was a matter for the trier of fact to decide, as it is an issue of fact rather than an issue of law. The sole issue was whether the offer lapsed or whether Appellant accepted it within a reasonable amount of time. The Court relied on Barnes v. Euster, 240 Md. 603 (1965), which held that generally the reasonableness of delays in acceptance is a question of fact unless those facts and inferences are undisputed. In Barnes, two years after an offer for the purchase of real estate subject to an unfulfilled condition to obtain rezoning was terminated by the seller, the buyer stated it was willing to waive such condition. The Barnes court held that the delay in acceptance was unreasonable as a matter of law, given the seller’s notice of termination and the rapidly rising prices of real estate. 

Here, the delay was a matter of hours not years, and there is no case in Maryland standing for the proposition that settlement offers lapse, as a matter of law, when the procedural posture of a case changes. An offer made during trial would certainly end at the time of final judgement, but not necessarily when trial merely resumes. When an offer that does not specify a time for acceptance is pending while trial proceeds, the issue of whether the offer was accepted in a reasonable amount of time is generally an issue of fact. The Court cited persuasive authority from a Pennsylvania case regarding settlement of a negligence case that circumstances such as the nature of the contract, the relationship of the parties, their course of dealing and usages of the particular business are all relevant. 

The full opinion is available in PDF.

Marcia Rankin, et al. v. Brinton Woods of Frankford, LLC, et al. (Ct. of Special Appeals)

Filed: June 27, 2019

Opinion by: J. Sharer

Holding: A contract was held to be procedurally and substantively unconscionable for failing to highlight arbitration, mediation and waiver of jury trial provisions through formatting; using misleading, contradictory, and undefined terms; and including an arbitration deposit requirement and loser-pay-all provision that could preclude recourse for parties lacking financial resources. 

Facts: Plaintiff filed a negligence suit for survival and wrongful death against the Defendant, a care center where the deceased allegedly developed serious health concerns. Defendant filed a motion to compel arbitration pursuant to the admission contract. The circuit court granted the motion as to the survival claims and stayed the wrongful death proceedings. On appeal, Plaintiff argued that the admission contract was unconscionable. 

Analysis: In order to decline to enforce an arbitration agreement, a court must find both procedural and substantive unconscionability. Doyle v. Fin. Am., LLC, 173 Md. App. 370, 383 (2007). The Court held that the contract was procedurally unconscionable because it was a standard-form contract, drafted entirely by Defendant. The first paragraph misleadingly stated that the contract contains financial obligations and residents’ rights. It failed to mention that the contract also contained a waiver of a constitutional right to a jury trial. Another section of the contract stated that it was impossible to cover all important matters in that document and that additional important documents were attached as exhibits. However, no attachments were included in the record, and there were no attachments regarding arbitration, mediation, and waiver. Additionally, the mediation and arbitration provisions were simply numbered paragraphs in the same format as the other paragraphs. They were not emphasized by bold, underlined or italicized font. The failure to highlight the arbitration, mediation and waiver provisions supported a finding of unconscionability. 

The Court held that the contract was substantively unconscionable because it did not provide criteria for the selection of mediators or scheduling and timing details for mediation. It did not address allocation of fees or costs of mediation. The arbitration provisions lacked clarity and were conflicting. The arbitration process would be consistent with the “American Arbitration Associate (sic)”. The terms “Arbitration Committee” and “subcommittee of three” were not defined; the latter was used only once. The word “binding” is used for the first and only time in section D of the clause. The last two paragraphs of section D present conflicting terms: the first paragraph states that the losing party can submit the matter to a state court. The next paragraph states that the “judgement” shall not be appealable; this is the first and only time the term “judgment” is used. Defendant is a sophisticated party, and these errors and ambiguities support a finding of unconscionability. Furthermore, there is no guidance on any estimated range of fees and costs, in addition to a loser-pays-all provision. A party who cannot pay the $1,000 arbitration deposit may have to forgo arbitration. These clauses could preclude recourse for a party lacking financial resources.

The circuit court had held that the admission contract was not unconscionable, but provided no factual support for its finding. See Henry v. Gateway, Inc., 187 Md. App. 647, 658 (unconscionability issues are often fact-intensive and the burden is on the party opposing arbitration). On appeal, Plaintiff also argued that the circuit erred in granting the motion based on its finding of apparent agency theory; the Court agreed. 

Full opinion available in PDF. 

Bayou Place Limited Partnership v. Alleppo’s Grill, Inc. (Maryland U.S.D.C.)

Filed: March 13, 2020

Opinion By:  Richard D. Bennett

Holding:  Under Texas law, while Hurricane Harvey has been recognized as an Act of God, Hurricane Harvey is not a legal excuse for failure to perform under a contract when the terms of the contract do not contain a force majeure clause.   

Facts:  Landlord, a Maryland limited partnership, brought suit against tenant, a Texas corporation, alleging continuing violations of a commercial lease agreement governing a property in Houston, Texas.  Tenant began to miss rent payments due under the lease beginning July 2017.  Hurricane Harvey made landfall in Houston in August 2017.  Harvey caused substantial damage to the property and the nearby theater district. 

Landlord provided notices of default from late 2017 through February 2018 and filed its complaint on September 14, 2018.  Tenant admitted receiving notice and failure to pay the entirety of its rent, while asserting several affirmative defenses and requesting declaratory judgement that “they be excused from certain obligations to pay rent due to Acts of God.”  Tenant argued that Hurricane Harvey was an Act of God that caused substantial damage and interference to the property and should excuse Tenant’s performance under the lease.  The Landlord moved for summary judgment. 

Analysis:

The Court applied Texas law to govern the breach of contract claim pursuant to the lease’s choice of law provision.  “An occurrence is caused by an act of God if it is caused directly and exclusively by the violence of nature, without human intervention or cause, and could not have been prevented with reasonable foresight.”  The Court recognized that Texas courts have found Hurricane Harvey to be an Act of God. 

The Court then discussed the interplay between an Act of God and a contract. “[A]n [A]ct of God does not relieve the parties of their [contractual] obligations unless the parties expressly provide otherwise.”  Further, “the scope and applicability of a force majeure clause depend on the terms provided in the contract.” 

“In other words, when the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure.”  The Court summarized, “[i]f the contract does not contain a force majeure clause, ‘Act of God is not a legal excuse for failure to perform.’”  Because the lease did not include a force majeure clause, the Court found that Hurricane Harvey is not a legal excuse for Tenant’s failure to perform the contract.  Further, Tenant began to miss payments prior to Harvey. 

The Court also reviewed the following additional affirmative defenses raised by Tenant:  offset of payments, unconscionability of late fees and frustration of purpose. 

The opinion is available in PDF.

Transamerica Premier Life Ins. Co. v. Selman & Co., LLC (Maryland U.S.D.C.)

Filed: July 9, 2019

Opinion by: Ellen L. Hollander

Holding:

The United States District Court for the District of Maryland denied a motion for failure to state a claim for (1) breach of contract, in light of ambiguous extrinsic evidence of intent to create a novation, and (2) unjust enrichment, where the existence of a contract governing the subject matter was in dispute.

Facts:

Plaintiff (“Insurer”) underwrote insurance products brokered and administrated by Defendant (“Agent”). Agent and Insurer’s business relationship eventually came to include products called TRICARE Supplements: voluntary plans offered to members of the military and their families that covered the various out-of-pocket costs not covered by the government-provided TRICARE health insurance program.

As Insurer and Agent transacted their insurance business together, three relevant sets of contracts came into being: one from 2002 (the “Original”), two acquired by assignment in 2014 (the “Acquired”), and a 2016 amendment to the 2002 agreement (the “Amendment”).

Under the 2002 Original agreement, Agent would administer and manage certain life and health insurance products, but the Original agreement’s language did not contemplate TRICARE supplement policies and lacked an exclusivity clause.

Pursuant to the 2014 Acquired agreement, Agent began to market, sell, and administer TRICARE Supplement policies in consideration of a portion of the premiums collected on those policies. In order to help Agent meet its contractual obligations, Insurer provided significant confidential and proprietary information (such as customer leads, records, risk analysis, performance results, and other non-public data). Agent and Insurer agreed to a confidentiality clause in order to protect this information, and to a narrow exclusivity clause with regard to the TRICARE Supplement policies marketed toward employers. An at-will termination clause allowed either party to terminate the Acquired agreement with 180 days' notice.

The 2016 Amendment reaffirmed the Original agreement but replaced the original fee schedule with a revised one that included the TRICARE accounts Agent had taken on since 2014. Two years passed.

In a November 2018 meeting, an Agent executive informed an Insurer executive about Agent's intent to move its TRICARE Supplement policies to one of Insurer’s competitors on January 1, 2019. Agent’s executive acknowledged the existence and enforceability of the exclusivity clause but implied that the provision only served to limit Insurer’s rights to underwrite coverage – not to limit Agent’s rights to move its business elsewhere.

Insurer promptly requested Agent cease and desist taking actions to transfer the policies, but Agent failed to comply. Insurer brought suit, alleging breach of contract (of the exclusivity and confidentiality clauses), anticipatory breach of contract (for failure to adhere to the 180-day notice requirement), and unjust enrichment (for taking Insurer’s data, services, and commission payments without consideration).

Agent moved to dismiss for failure to state a claim.

Analysis:

The court began by noting that in order to survive a Rule 12(b)(6) motion, the complaint must contain facts sufficient to state a claim to relief that is plausible at face value. Sufficiency required more than bald accusation or mere speculation, but less than detailed factual allegations: enough to suggest a cause of action even if the actual proof was improbable or recovery was unlikely. Accordingly, the court indicated the authenticity and import of the contract documents at issue and noted it would consider them at the 12(b)(6) complaint stage.

The court next evaluated whether the 2016 Amendment constituted a novation. If so, it would supersede the terms of the earlier Original and Acquired agreements, eliminating any language about exclusivity or confidentiality and mooting Insurer’s claims for breach of contract.

A novation forms a new contractual relationship and requires four elements: (1) a previous valid obligation, (2) agreement of the parties to the new contract, (3) validity of the new contract, and (4) the extinguishment of the old contract by substitution.

The court was ultimately unpersuaded that the parties had intended a novation because the contract text failed to clearly establish the parties’ intent to extinguish the 2002 Original and 2014 Acquired documents with the 2016 Amendment. The court considered the parties’ conflicting and ambiguous extrinsic evidence about their motivations for the 2016 Amendment to indicate lack of the requisite clear intent. In a light most favorable to Agent, the extrinsic evidence suggested an intent to keep separate and in force certain terms. Due to the conflicting extrinsic evidence, the court considered it premature (at the 12(b)(6) stage) to conclude that a novation could have occurred. Because the court declined to find a novation at this stage, Insurer had clearly stated a viable claim for breach of contract. The court separately noted that although Insurer had established sufficiency for its anticipatory breach claim, it would construe the count as one for breach of contract because the “anticipatory” relationship to January 1, 2019 had expired.

Finally, the court evaluated the unjust enrichment claim, explaining the general rule that no quasi-contractual claim for relief could arise where an actual contract existed. But a plaintiff is not barred from pleading such a theory in the alternative where existence of a contract was in dispute. At the 12(b)(6) stage, the court found it premature to conclude that one or the other or no contract language might govern the claim at issue. Accordingly, Insurer had met its burden of sufficiency for a claim of unjust enrichment.

The court denied Agent’s motion to dismiss in its entirety.

The full opinion is available in PDF.

Credible Behavioral Health, Inc. v. Johnson (Ct. of Appeals)

Filed: November 20, 2019

Opinion by: Judge Clayton Greene Jr.

Holding: On appeal, the circuit court must review the district court’s factual determinations for clear error and legal conclusions de novo.  Pursuant to a valid promissory note, an obligation to repay an employer-provided tuition loan exists whether the employee is fired or quits.

Facts:

Petitioner (“Employer”) offered a tuition loan program to its employees in an effort to both cultivate professional development and incentivize employee retention. Under this program, Employer agreed to provide tuition payments toward undergraduate, graduate, or post-graduate programs in the form of a loan to the participating employee. Upon completing their study, the employee might have to repay Employer the full cost, some percentage, or enjoy loan forgiveness depending on how long they remained at the company.

Respondent (“Borrower”) was in the service of Employer in 2016 and entered into its tuition loan program that year. Borrower signed an unsecured promissory note which stated in relevant part:

1. Principal Repayment: (a) The principal balance of the Loan plus all accrued interest thereon shall be due and payable in accordance with the following schedule:

(i) If you terminate employment with the Company within 12 months following achievement of the degree, 100% of the loan;
(ii) If you terminate employment with the Company after the 12 month anniversary but on or before the 24 month anniversary following achievement of the degree, 75% of the Loan;
(iii) If you terminate employment with the Company after the 24 month anniversary but on or before the 36 month anniversary following achievement of the degree, 50% of the Loan;
(iv) If you terminate employment with the Company after the 36 month anniversary following achievement of the degree, 0% of the Loan;

The appropriate percentage of the Loan… shall be due and payable 90 calendar days after the termination of your employment, whether by you or the Company, for any or for no reason whatsoever…

Employer loaned Borrower $12,529 under the tuition loan program, but terminated him in December 2017. At that time, Borrower had not yet acquired his degree. Employer and Borrower entered into a repayment plan under which Borrower made one payment in February 2018 and no further payments.

Employer’s attorneys issued a demand letter in April 2018 for full payment of the loan balance by May 2018. Receiving no subsequent payments, in June 2018 Employer sued Borrower in the District Court of Maryland sitting in Montgomery County.

The court found in Borrower’s favor, reasoning that the amounts under the repayment plan only became due if Borrower quit because the provisions within 1(a) were inconsistent: subsections 1(a)(i)-(iv) applied where an employee quit while the paragraph following applied where an employee was terminated. Without a basis to determine how much Borrower owed, the trial judge found the inconsistency should go against the party who drafted the contract.

On appeal, the Circuit Court for Montgomery County found the lower court not clearly erroneous in its interpretation and affirmed the judgment.

Employer subsequently sought and received a writ of certiorari.

Analysis:

Three questions lay before the court: (1) whether the appellate court correctly applied Md. Rule 7-113(f) when it reviewed the trial court’s contract construction for clear error rather than de novo, and (2) whether the plain terms of the contract entitled Employer to a judgment against Borrower, and (3) whether Maryland law required the appellate court to choose one of two possible readings of the contract consistent with the parties’ intent.

The court began by referencing both statute (Md. Rule 8-131(c)) and case law (Friendly Finance v. Orbit, 378 Md. 337, 342-43 (2003)) to delineate the standards of review under Md. Rule 7-113(f): judgments of a bench trial court on the evidence should not be set aside unless clearly erroneous, but the trial court’s conclusion, interpretation, or application of law must be reviewed de novo.

Contract interpretation is a clear example of a legal determination and therefore subject to de novo review. Therefore the appellate court improperly applied Md. Rule 7-113(f) in failing to review the trial court’s promissory note interpretation anew.

Accordingly, the court began a de novo review. The basic dispute centered about whether an obligation to repay existed depending on whether an employee was fired or had quit. The court found the language of 1(a) to have two contrary interpretations: an obligation to repay in both situations (fired or quits), or an obligation to repay only where the employee quits.

Examining the promissory note’s text, the court inquired into the intent of the parties by determining from the language of the agreement what a reasonable person would have meant at the time. The promissory note’s preamble communicated that “…[Borrower] unconditionally promises to pay…the aggregate principal…with all accrued and unpaid interest thereon.” The paragraph following 1(a) also clearly constituted an obligation to repay the loan: “The appropriate percentage of the Loan set forth above, plus all accrued interest thereon shall be due and payable (i) ninety (90) calendar days after the termination of your employment, whether by you or the Company, for any or for no reason whatsoever…” The subsections 1(a)(i-iv) merely determined the amount owed based on the employee’s tenure after attaining his degree.

Finding the conditions of 1(a) meaningful although awkwardly worded, the court could see no substantive indication that the amount owed should become due only where an employee unilaterally ended his employment. Because both parties had stipulated to the promissory note’s clarity (lack of ambiguity), the court declined to construe its terms against the drafter.

Finally, the court reminded that Maryland courts consistently strive to interpret contracts in accordance with common sense, and that the lower courts’ interpretation ran contrary to common sense because of the resulting disparate treatment of employees based on whether they were fired or voluntarily quit. In the nonsensical construction, a fired employee received loan forgiveness while the employee who quit kept his obligation. If this construction controlled, an employee who wanted to leave Employer and shirk his promissory note obligation could simply act in a manner that would compel the company to fire him.

Reversing the appellate court’s decision, the court determined its interpretation – that the parties intended the tuition loan to be repaid regardless of whether the employee quit or was fired – to be reasonable, in accord with a common sense approach, and with an effect of harmonizing the substance of the various sections of the promissory note.

The full opinion is available in PDF.

Gables Construction v. Red Coats

Gables Construction v. Red Coats (Ct. of Special Appeals)

Filed: February 27, 2019

Opinion by: Judge Alexander Wright.

Holding:

Contractual waivers of subrogation do not shield a contracting party from third-party contribution and direct liability under the Maryland’s Uniform Contribution Among Joint Tort-Feasors Act (“UCATA”)

Facts:

Upper Rock was the owner of a residential building project and hired Plaintiff Gables Construction (“GCI”) as the General Contractor, wholly owned by Gables Residential Services, Inc. (“GRSI”), to build the building. GSRI hired Defendant Red Coats, Inc./Admiral (“Red Coats”) to provide security and fire watch services monitoring during the construction period from approximately 5 pm to 6 am pursuant to a vendor services agreement (the “VSA”).  In the GSRI-Red Coats VSA, Red Coats waived subrogation; also, GCI is named as an additional insured in the VSA.

A fire damaged a building as it was almost completed.  The fire may have been caused by space heaters.  Upper Rock sued Defendant, and they settled.  Defendant then sued Plaintiff, claiming it was liable because it provided no training on the operation of the space heaters to Defendant.

Analysis:

The Court of Special Appeals agreed with the Montgomery County Circuit Court that Red Coats’ settlement with Upper Rock does not preclude Red Coats from seeking contribution from GCI under Maryland’s UCATA.

Citing Homeseekers’ Realty v. Silent Automatic Sales, 163 Md. 541, 545 (1933), a “contract is binding only upon the parties to the contract and their privies.”  

Before Maryland enacted its UCATA in 1941, “a statutory right of contribution among joint tortfeasors….did not exist.”  See Central GMC v. Helms, 303 Md. 266, 276(1985).  Thus, injured parties cherry-picked which tortfeasor to sue.

UCATA provides that a release of one joint tortfeasor does not relieve the liability of other joint tortfeasors.  If it did, it could create a chilling effect on business relationships.

The full opinion is available PDF.

Capital Finance, LLC v. Rosenberg (Maryland U.S.D.C.)

Filed:  January 23, 2019

Opinion by:  Richard D. Bennett

Holding:  The word “and” in a “bad boy” guaranty agreement may require a disjunctive reading of the provision due to the character of the contract when the language is unambiguous and when a conjunctive reading would render the guaranty meaningless, even if a conjunctive reading of the provision is theoretically possible.

Facts:  On July 1, 2015, a lender (the “Lender”) entered into a Credit and Security Agreement and a Note with a group of skilled nursing facilities and long term hospitals (the “Borrower”) controlled by two individuals (the “Guarantors”) who personally guaranteed the financing.  As a condition precedent to the financing, a Guarantor submitted Borrowing Base Certificates that warranted the facilities had paid all payroll taxes.  The Credit Agreement required the Borrower to deposit proceeds into bank accounts by a Deposit Account Control Agreement (the “DACA”).  The Guarantors executed “bad boy” guaranties, “which required them to satisfy all outstanding obligations” upon the Borrower’s commission of fraud or illegal acts. 

The Borrower failed to pay payroll taxes, triggering the guaranties.  The Borrowing Base Certificates falsely represented that Borrower had paid these taxes.  Between December 2016 and January 2017 the terms of the Credit Agreement were further violated when payments were diverted from DACA-controlled accounts to an account that was not controlled by the Lender.  

Section 1(d) of the guaranties provided the following: 

Notwithstanding any provision herein to the contrary, Agent acknowledges that this Guaranty and the Guaranteed Obligations hereby shall only be applicable and enforceable against the Guarantor in the event that: (a) Borrower colludes with other creditors in causing an involuntary bankruptcy or insolvency proceeding involving any of the Credit Parties in an effort to circumvent, avoid or impair the rights of Agent or the Lenders, (b) a voluntary bankruptcy filing by Borrower to the extent that a court of appropriate jurisdiction determines that such filing was made otherwise than in accordance with applicable law, and (c) any act of fraud or other illegal action taken by Borrower or any Credit Party in connection with the Credit Agreement or any other Financing Document.  [emphasis added]

On June 8, 2018, the Lender demanded payment from the Guarantors under the guaranties.  The defendants argued that all three events listed in Section 1(d) of the guaranties must have occurred to trigger liability pursuant to the guaranties. 

Analysis:  “To prevail on a claim for breach of contract under Maryland law, a party must prove the existence of a contractual obligation, a material breach of that contractual obligation, and resulting damages.”  A court does not need to consult extrinsic evidence when a contract is unambiguous.  Maryland law, as provided in Bankers & Shippers Ins. Co. v. Urie, recognizes that the word “and” may require a “disjunctive reading in light of the character of the contract.”  After finding that Section 1(d) of the guaranties is not ambiguous, the court stated that the guaranties would be rendered meaningless if the defendants’ argument held.  “A bad boy guaranty which remains unenforceable until Borrower engages in an implausible triad of egregious conduct, any one of which would seriously inhibit the lender’s access to collateral, does not provide this sort of incentive – it is not a guaranty at all.”  While the defendants’ interpretation of the guaranties is possible – a single entity may undergo voluntary and involuntary bankruptcy proceedings – it is not the reading of a reasonable person. The court found that each of (i) failing to pay payroll taxes and (ii) submitting false Borrowing Base Certificates constituted fraud and provided a base for liability under the guaranties.  

The court also stated that the “No Waiver” section of the Credit Agreement and the “Guaranty Absolute” provision of the guaranties precluded “affirmative defenses of equitable estoppel, waiver, release, and laches.”

The full opinion is available here in PDF.  

URS Corp. v. Maryland-National Capital Park & Planning Commission (Ct. of Special Appeals, Unreported)

Filed: July 6, 2018

Opinion by: Judge Doug Nazarian

Holding: Separate indemnification provisions in multiple documents that form a single agreement between the parties are not in conflict with each other where one indemnification provision provides a duty to defend but the other is silent. 

Facts:  The Maryland-National Capital Park and Planning Commission (the "Commission"), as part of Montgomery County, and URS Corporation ("URS") entered into an agreement for URS to provide the Commission with engineering services for the construction of the Rock Creek Hiker-Biker Trail Bridge over Veirs Mill Road.  The agreement consisted of: (1) a basic ordering agreement between Montgomery County and URS for transportation and engineering services to facilitate the planning and design of various projects (the "BOA"); (2) a request for proposal, extending the basic ordering agreement to include the Commission as a party; (3) a task order issued by the Commission for the specific engineering services; (4) a proposal from URS in response to the task order; (5) a contract between the Commission and URS for the specific engineering services (the "Contract"); and (6) the Commission's procurement rules, regulations and laws.  The BOA contained an indemnification provision that, in addition to indemnification, obligated URS to defend Montgomery County (including the Commission) in any action or suit arising out of URS's "negligence, errors, acts or omissions" arising under the BOA.  The Contract contained an indemnification provision that did not expressly obligate URS to defend any such claims.  The Contract also provided that, in the event of a conflict among the documents comprising the agreement among the parties, the Contract had precedence over the BOA.

Fort Myer Construction Corporation (the "Subcontractor") was retained to assist in the construction of the bridge.  The Subcontractor filed suit against the Commission claiming damages and delays due to defects in URS's design.  The Commission sent a letter to URS invoking URS's duty-to-defend and indemnification obligations under the basic ordering agreement. URS denied the Commission's demand and refused to defend or indemnify the Commission.  The Commission filed suit against URS for breach of contract and sought indemnification and contribution and URS countersued the Commission for failure to pay URS for work performed under the Contract.

Analysis: After multiple hearings and procedural matters that are not relevant for purposes of this analysis, the Court of Special Appeals (in an unreported opinion) affirmed the lower court's finding that URS had a duty to defend the Commission in the lawsuit brought by the Subcontractor.  The court was not persuaded by URS's argument that the indemnification provisions of the BOA and the Contract were in conflict because "the duty to defend is distinct from, and broader than, the duty to indemnify"; therefore, the duty to defend in the BOA supplemented the indemnification obligations in the Contract.  The Contract's silence regarding any duty to defend did not negate the express language of the BOA.  

The court was also not persuaded by URS's argument that the BOA applied only to the pricing of goods and services because the Contract unambiguously and unqualifiedly stated that the BOA was incorporated into the Contract.  The court found URS breached its agreement with the Commission by refusing to defend the Commission in the lawsuit brought by the Subcontractor, even though the suit was ultimately dismissed for a procedural error committed by the Subcontractor, because the duty to defend was triggered by the Subcontractor filing suit against the Commission regardless of the validity of the Subcontractor's claim.

This is an unreported opinion.  See Md. Rule 1-104.

The full opinion is available in pdf.

IES Commercial v. Manhattan Torcon A Joint Venture (Maryland U.S.D.C.)

Filed: September 26, 2018

Opinion by: Judge Bennett

Holding:  Subcontractor’s breach of contract claim fails under the “cardinal change” theory because the parties amended the contract and therefore Subcontractor was not “ordered” to perform additional work outside the scope of the original contract.

Facts:  The U.S. Government hired General Contractor to build a biological research facility for the Army at Fort Detrick.  General Contractor hired Subcontractor for the electrical work.  A fire destroyed the building after Subcontractor had performed 92.5% of the work.
 

General Contractor and Subcontractor agreed to a Fire Rider that amended the original contract.  The rider set forth new, additional terms and conditions.  The Subcontractor then performed fire mediation work pursuant to the rider.  However, because the General Contractor was not required under the Fire Rider to pay the Subcontractor until the insurer paid the General Contractor, the General Contractor refused to pay the Subcontractor for a portion of the additional work.  The Subcontractor sued for breach of contract under a cardinal change/quantum meruit and other theories. 

Analysis:  A “cardinal change” occurs in the context of a government contract “when the government demands a contractual alteration ‘so drastic that it effectively requires the contractor to perform duties materially different from those originally bargained for.’”  Hancock Electronics Corp. v. WMATA (4th Cir. 1996).  This theory developed when the government began issuing unilateral contract modifications without seeking the consent from subcontractors and without being in breach of contract.  Crown Coat Front Co. v. US (USSC 1967).  If the unilateral modification exceeds the scope of the contract’s changes clause, then a cardinal change has occurred.  AT&T Comms. v. Wiltel (Fed. Cir. 1993).  Accordingly, a change is cardinal when it cannot be said to have been within the contemplation of the parties when they entered into the contract.  When the government orders a modification that constitutes a cardinal change, the result is a material breach of the contract, which “has the effect of freeing the contractor of its obligations under the contract, including its obligations under the disputes clause.” JJK Grp. v. VW Int’l (D. Md. March 27, 2015).

Here, the Subcontractor asserted that the fire “changed the nature of the Project from new construction to a disaster recovery, restoration, and reconstruction Project,” fundamentally altering the work Subcontractor had contracted to perform for General Contractor under the Subcontract.  However, the parties amended the contract via the Fire Rider, so the government never took unilateral action in altering the contract.  Similarly, the fire itself cannot be considered a cardinal change, nor can the altered work be either.

The full opinion is available PDF.

Young Electrical Contractors v. Dustin Construction (Ct. of Appeals)

Filed:  May 24, 2018

Opinion by:  Judge McDonald

Holding:

Maryland courts interpreting construction contracts under Virginia law will first look to the contract language and then to parol evidence to determine the intent of the parties regarding whether a construction subcontract contains a pay-when-paid or pay-if-paid clause.

Facts:

George Mason University (“Owner”) hired Dustin Construction (“General Contractor”) to renovate the school’s student union building, and General Contractor hired Young Electrical (“Subcontractor”) for the electrical work.

The Subcontract contained a provision “Contractor’s obligation to pay … Subcontractor … is contingent, as a condition precedent, upon Contractor’s receipt of payment from the Owner…” (Section 2(c)).

Subcontractor submitted cost increase requests to General Contractor, which submitted cost increase requests to Owner.  Owner rejected the request; General Contractor never paid the additional cost to Subcontractor.  Subcontractor sued General Contractor for breach of contract.  The Circuit Court for Montgomery County granted General Contractor’s motion for summary judgment.  Subcontractor appealed.

Analysis:

“Contract interpretation is governed by the law of the place of contract or the law chose by the parties.”  Cunningham v. Feinberg, 441 Md. 310, 326 (2015). However, the standard for summary judgment is governed by the law of the forum, in this case Maryland law. Goodwich v. Sinai Hosp. of Baltimore, Inc., 343 Md. 185, 204-207 (1996). Under the Maryland Rules, a circuit court may grant summary judgment only if there is no genuine dispute as to any material fact, and the moving party is entitled to judgment as a matter of law. Maryland Rule 2–501(f).

The Virginia Supreme Court has referenced Maryland law in examining the issue in this case.  The Maryland Court of Appeals relied on a 1962 Sixth Circuit case (Thos. J. Dyer Co. v. Bishop Int’l. Engineering Co.) when it examined the issue in Atl. States Const. Co. v. Drummond & Co. (1968) and Fishman Constr. Co. v. Hansen (1965).  In Maryland, Conditional Payment provisions are to be construed as timing provisions (pay-when-paid clauses) unless the contract language clearly indicates that the parties intended the clause to be a condition precedent (pay-if-paid clause). The Special Court of Appeals had affirmed the Circuit Court’s decision.  It held that Section 2(c) contained the “magic phrase” “condition precedent”.

The Court considered whether the General Contractor was entitled to summary judgment for the reason given by the Circuit Court and concluded it was not, then went through an analysis of the reason for summary judgement originally argued by the General Contractor. 

The full opinion is available PDF.

Maryland Financial Bank v. Congressional Bank (Cir. Ct. Mont. Cnty)

Filed: May 17, 2018

Opinion by: Judge Anne K. Albright

Holding:  Assignment of key obligations undertaken by a party to a contract containing an anti-assignment provision or other protective provision in favor of the non-assigning party is invalid and unenforceable if such assignment is made without the consent of the non-assigning party. 

Facts:  American Bank (“American”) originated a loan that was secured by a first lien against real property (the “Loan”).  American simultaneously entered into a participation agreement with Maryland Financial Bank (“MFB”) entitling MFB to an undivided 50% interest in everything arising from or out of the Loan and Loan documents.  The participation agreement provided that, among other things, American could not make material changes to the terms of the Loan without MFB’s consent or assign its obligations or duties as servicer of the Loan without MFB’s consent, but American could sell additional participations in the Loan (provided such action would not adversely affect the rights of MFB), control the course of action upon a Loan default after consulting MFB, and service the Loan.  MFB simultaneously sold a majority of its participation interest to National Bank of Cambridge, which later became 1800 Bank (“1800”).

American began to effect a plan of merger with Congressional Bank, during which time American declared a default on the Loan and, with the assistance of Congressional, assigned all of American’s right, title and interest in the Loan to Democracy Capital Corporation (“Democracy”). Congressional continued servicing the Loan after assignment to Democracy.  The assignment was made without MFB’s consent and, among other things, provided Democracy with a consent right before Congressional could take action upon an event of default and gave Democracy the right to terminate Congressional as the servicer.  MFB filed suit against Congressional and Democracy claiming that, by assigning the Loan to Democracy, Congressional had violated the participation agreement; 1800 was joined as a necessary party and all parties countered seeking a declaration as to their respective rights.  As part of a settlement agreement, Congressional transferred its servicing obligations to 1800 with MFB’s consent and over Democracy’s objections, and MFB, 1800 and Congressional dismissed their claims against each other; however, MFB, Democracy and 1880 were still seeking declaratory judgment as to 1880’s and Democracy’s rights and obligations relating to the Loan.  Democracy argued that 1800 did not have standing to seek a declaratory judgment as it was not a party or third-party beneficiary of the assignment between Democracy and American/Congressional.

Analysis:  As an initial matter, the Court held that, because 1800 was a party to the settlement agreement, it had standing to bring an action for declaratory judgment. Applying the “cardinal rule of contract interpretation” to “give effect to the parties’ intentions,” the court further held that the assignment to Democracy of certain of American’s key obligations related to the Loan violated the terms of the participation agreement.  Although the participation agreement gave American the right to sell participation interests in the Loan on terms different from those in participation agreement with MFB, American could not involve other participants in a manner that would adversely affect the rights and obligations of MFB.  After the assignment, not only did Democracy have the same right as MFB to prevent Congressional from assigning the servicing obligations, it could actually terminate Congressional as the servicer; Democracy also had final say as to the course of action upon a Loan default.

Democracy’s claim that the assignment of the servicing from Congressional to 1800 without Democracy’s failed because the court held that Democracy never had the right to consent to such assignment in the first place as the provisions of the assignment of the Loan to Democracy purporting to give Democracy the right to terminate Congressional as the servicer and withhold consent to any assignment by Congressional of its servicing obligations were invalid.  Therefore, 1800, as the sole servicer of the Loan pursuant to the settlement agreement, was the only party who had the right to foreclose on the real property that had been mortgaged as collateral for the Loan. 

Full text of opinion available here.

Meso Scale Diagnostics v. Crescendo Biosciences (Cir. Ct. Mont. Cnty.)

Filed: November 29, 2017

Opinion by: Judge Rubin

Holding:

The post-termination materials requirements contract provision was enforceable despite it being removed during negotiations. In resolving a contract dispute, governed by Delaware law, the court may consider extrinsic evidence of the parties’ intentions.

Facts:

William Hagstrom (“Hagstrom”) formed Defendant in 2007 to commercialize Vectra DA, a test for rheumatoid arthritis.  On March 2, 2009, Defendant accepted Plaintiff’s proposal to evaluate the Vectra DA test’s viability.  The parties began to negotiate for a long-term supply agreement in 2010 after the development phase.  Both parties were invested in their relationship for the long-term, and Defendant knew that Plaintiff wanted to share in the long-term success of Vectra DA. Hagstrom understood that Plaintiff would not move forward with signing the agreement without some means of sharing in the upside potential if the product was commercially successful.

Section 10.1 of the Purchase Agreement contained the post-termination provision.  The Court found Plaintiff’s General Manager’s, Jim Wilbur’s (“Wilbur”), testimony more credible than Hagstrom’s testimony regarding Wilbur explaining Section 10.1 to Hagstrom.  Hagstrom denied Wilbur explained it and further argued that he never intended Defendant to be bound to deal with Plaintiff after the contract’s termination.  During the negotiation process, the provision was removed and re-inserted at least once, but the agreement that Hagstrom signed on April 2, 2012, included Section 10.1. 

On April 21, 2016, Defendant notified Plaintiff that it intended to terminate the agreement effective on April 30, 2018.  Plaintiff sued Defendant on May 23, 2016. (see the opinion for litigation details).

Analysis:

In Delaware, the parties’ subjective expressions are considered when a contract is negotiated between parties on an equal footing and the contract/provision is ambiguous.  SIManagement L.P. v. Wininger, 707 A.2d 37 at 43 (1998).  Extrinsic evidence that is considered “must speak to the intent of all of the parties to the contract.”  Id.  In addition, contracts “should be read to give effect to all its provisions and not to render any part of it ineffective.”  Restatement (Second) of Contracts § 203(a) (1981).

The Court acknowledged that Hagstrom was a “seasoned biotech entrepreneur with more than three decades of executive and board-level experience”, having raised $100 million for Defendant from venture capital firms.  In addition, the contract was reviewed by a global law firm.  The Court found Section 10.1 was a “business compromise” and the materials requirement was a “central element of the bargained for exchange”.

The full opinion is available PDF.

Deutsch v. G&D Furniture Holdings (Ct. of Special Appeals, Unreported)

Filed: August 28, 2017

Opinion by: Judge Nazarian

Holding:

A business owner’s requests for inspection of financial books and records relating to the management of a corporation and for the appointment of a receiver fall within the arbitration provision in a Stockholders Agreement that set forth comprehensive agreements involving many businesses and 55 investors.

Facts:

Plaintiff and Defendant jointly owned many retail furniture businesses.  In 2006, the parties executed a Stockholders Agreement, which replaced a 1990 agreement.  The Stockholders Agreement set forth comprehensive agreements regarding the ownership of the companies, transferability of corporate shares, management of the companies, composition of the board of directors, division of profits, payment of dividends, maintenance of life insurance policies on stockholders, as well as providing for mediation and arbitration “in the event that there is any dispute between the parties regarding this Agreement.”

As the businesses encountered setbacks, the parties held different views about the operation and management of the business, financial decisions, the creation of other entities to which business assets allegedly were transferred, and decisions to wind down the original businesses.  The disputes between the parties ultimately led to litigation.  The Court of Special Appeals affirmed the Circuit Court for Anne Arundel Court’s decision that the Stockholders Agreement’s arbitration clause should be read broadly to include the requests for a receiver and to inspect the books.

Analysis:

The Maryland Uniform Arbitration Act “embodies a ‘legislative policy’ in favor of the enforcement of agreement[s] to arbitrate.”  Harris v. Bridgford, 153 Md. App. 193, 201 (2003) (quoting Allstate Ins. Co. v. Stinebaugh, 374 Md. 631, 641 (2003)).  Although arbitration is favored, the contract language and intent of the parties must be respected.   “Where there is a broad arbitration clause calling for the arbitration of any and all disputes arising out of the contract, all issues are arbitrable unless expressly and specifically excluded.”  Gold Coast Mall, Inc. v. Larmar Corp., 298 Md. 96, 104 (1983).

Combined with the policy to read arbitration clauses broadly (The Redemptorists v. Coulthard Servs. Inc., 145 Md. App. 116, 149 (2002) (citing NSC Contractors, Inc. v. Borders, 317 Md. 394, 403 (1989)), the Court held the arbitration clause’s “regarding this Agreement” language indicated that the parties intended to require alternative resolution of everything they disputed.

The Court also held that the Defendants did not waive their right to compel arbitration of the claims in the counterclaim merely by filing pleadings in this litigation (their pleadings requested the court compel arbitration).

This is an unreported opinion.  See Md. Rule 1-104.

The full opinion is available PDF.

Schneider Electric Buildings Critical Systems v. Western Surety (Ct. of Appeals)

Filed: July 28, 2017

Opinion by: Judge Adkins

Holding:

A surety company that guarantees performance of a construction subcontract with a performance bond is not bound by the subcontract’s mandatory arbitration clause when the subcontract is incorporated by reference into the bond and the clause refers only to the subcontract’s parties and the bond allows for dispute resolution in court.

Facts:

In May 2009, Plaintiff, a construction contractor, signed a Master Subcontract Agreement (“MSA”) with NCS, an electrical subcontractor, to cover future projects.  The MSA included a mandatory arbitration clause (the “Clause”).  In October 2009, Plaintiff was hired by another construction contractor to help build a medical research facility.  Plaintiff in turn hired NCS to help with the project.  Plaintiff and NCS signed a subcontract (“NCS Subcontract”) that incorporated the MSA by reference.  The NCS Subcontract required NCS to furnish a performance bond (“Bond”), which it obtained from Defendant.  The Bond made NCS and Defendant jointly and severally liable to Plaintiff for performance of the NCS Subcontract.

During construction, a dispute arose, NCS abandoned the site and Plaintiff terminated the contract.  In February 2014, Plaintiff filed a demand for arbitration with NCS.  In April 2014, Plaintiff amended the demand to include Defendant.  Defendant filed a petition in Howard County Circuit Court in which it requested a declaratory judgment that it was not bound by the Clause.

The case was transferred to a more proper venue, Harford County Circuit Court, which granted partial summary judgment for Defendant.  That court explained that the Bond is only insuring that Defendant is liable for any construction that has not been performed, and found no evidence of an intention that Defendant should be bound to dispute resolution provisions of the MSA.  

The Court of Special Appeals affirmed, holding that “the ‘joint and several’ obligation clause in the (Bond) does not evince (Defendant’s) assent to be bound by the (Clause) in the incorporated-by-reference chain of documents.”  Schneider Elec. Bldgs. Critical Sys., v. Western Sur. Co., 231 Md. App. 27, 46 (2016).  The Court of Appeals granted Plaintiff’s petition for a writ of certiorari.

Analysis:

The Court of Appeals applied Maryland contract law to determine if Defendant is bound by the Clause.  Precedent in Maryland requires courts to look at the intention of the parties as expressed in the language of the contracts.  The Court of Appeals explained in Hartford Accident & Indem. Co. v. Scarlett Harbor Assocs., 346 Md. 122, 127 (1997) that “arbitration is a process whereby parties voluntarily agree to substitute a private tribunal for the public tribunal otherwise available to them” and an arbitration clause “cannot impose obligations on persons who are not a party to it and do not agree to its terms.” 

The Court of Appeals interpreted the Bond by “constru(ing) (the Bond, NCS Subcontract, and MSA) as a whole…not (by) read(ing) each clause or provision (of each contract) separately.”  Owens-Illinois v. Cook, 386 Md. 468, 497 (2005).

Here, the Court of Appeals agreed with the lower courts because the Clause refers to the “parties” to the NCS Subcontract (which are Plaintiff and NCS) and the Bond permits court actions to resolve disputes between NCS and Defendant.  Since Defendant was not a “party” to the NCS Subcontract, the Clause does not apply to Defendant.  The Court of Appeals found support in its holding in Liberty Mutual Insurance v. Mandaree Public School District #36, 503 F.3d 709 (8th Cir. 2007), whose facts are similar to this case.

The full opinion is available PDF.

James Dillon v. BMO Harris Bank, N.A. (4th Circuit)

Filed: May 10, 2017

Opinion by: Judge Barbara Milano Keenan

Holding: An arbitration agreement containing choice-of-law provisions applying tribal law and disclaiming the application of federal and state law was held to be unenforceable because (1) by its unambiguous language, it triggered the prospective waiver doctrine, which disallows arbitration agreements that prevent litigants from vindicating federal substantive statutory rights as contravening public policy; and (2) the provisions could not be severed as they went to the essence of the agreement and were negotiated by a party, not in good faith, with superior bargaining power.

Facts:  Plaintiff, a resident of North Carolina, applied for and received a “payday loan” in 2012. “Payday loans” are short, unsecured consumer loans for small amounts and with generally high interest rates (sometimes in excess of 400%). The loan was offered through the website of Great Plains Lending, LLC (the “Company”), which was wholly owned by a federal tribe.  Plaintiff executed a contract (the “Contract”) that contained a loan agreement and an agreement to submit disputes to arbitration. Both agreements contained choice-of-law provisions that required the application of tribal law and disclaimed the application of state or federal law.

Plaintiff filed a putative class action lawsuit in district court, claiming that the Company and other tribal lenders had issued unlawful loans. Instead of suing the lenders for violating state usury laws, Plaintiff sued the financial institutions that facilitated the electronic lending transactions. Plaintiff claimed that the institutions constituted an enterprise whose members, including Defendant BMO Harris (“Defendant”), conducted and participated in the collection of unlawful acts in violation of the Rackeeter Influenced and Corrupt Organizations Act.

In district court, Defendant sought to compel arbitration pursuant to the terms of the Contract and relying on the Federal Arbitration Act (“FAA”). The district court held the Contract unenforceable because it denied the applicability of all federal and state law. Defendant appealed.

Analysis: Pursuant to the FAA, the Court has jurisdiction to review de novo the order denying the motion to compel arbitration. The FAA provides that arbitration agreements are valid and enforceable, except upon grounds at law or in equity for the revocation of any contract. Consistent with such contract principles, the Supreme Court has held that arbitration agreements that operated as prospective waivers of a party’s right to pursue statutory remedies are unenforceable as violating public policy. This prospective waiver doctrine keeps courts from enforcing arbitration agreements that prevent a litigant from vindicating federal substantive statutory rights. 

A mere foreign choice-of-law provision is insufficient to trigger the application of the doctrine. A court must first analyze whether, as a matter of law, “the choice-of-forum and choice-of-law clauses operate in tandem as a prospective waiver of a party’s right to pursue statutory remedies.” Where it is unclear, the arbitrator should decide in the first instance whether a litigant is deprived of those remedies, and the waiver issue is not ripe until a federal court is asked to enforce the arbitrator’s decision. 

In Hayes v. Delbert Services Corp., 811 F.3d 666 (4th Cir. 2015), the Court applied the prospective waiver doctrine to a contract governing an internet payday loan by another federal tribe lender. The choice-of-law provision disclaimed the application of any law other than that of the tribe. The Hayes Court held that this language flatly and categorically renounced the authority of federal statutes. The provision was not severable from the contract because it went to its essence; the animating purpose of the agreement was to circumvent federal law. Another disclaimer of the application of federal and state law in the contract lent support to this position.

Here, Defendant argued that the waiver issue was not ripe as it had not yet come before an arbitrator. Plaintiff countered that the issue was ripe because the language of the choice-of-law provision was unambiguous, thus triggering the prospective waiver doctrine. The Court agreed with Plaintiff. The choice-of-law and other provisions in the Contract are similar or identical to the provisions in Hayes; these applied the law of the federal tribe or disclaimed the application of federal and state laws as to the Contract and lender. As in Hayes, the Contract was an unambiguous attempt to apply tribal law to the exclusion of federal and state law.

The Court held that the choice-of-law provisions could not be severed from the Contract. Severance is allowed only if the provision is not essential to the agreement and the party seeking to enforce the remainder of the agreement negotiated it in good faith. Restatement Second of Contracts § 184 (1981). Here, as in Hayes, the provision went to the essence of the agreement. The Court did not accept Defendant’s request to grant Plaintiff access to federal substantive rights because this would essentially allow Defendant to rewrite the Contract and defeat the purpose of the Contract entirely.

Additionally, the Company used its superior bargaining power to avoid the application of state and federal law, and Section 184 does not permit redrafting where superior bargaining power is used to extract a promise offensive to public policy. Thus, the Company did not meet the second prong to negotiate in good faith.  

The full opinion is available in PDF. 

Rullan v. Goden (U.S.D.C.)

Filed: March 24, 2016

Opinion by: Catherine C. Blake, District Judge

Holdings:  (1) Personal jurisdiction over an out-of-state entity can be shown when a related entity transacts business in Maryland and the out-of-state entity does not maintain separate books and records, accounting procedures and directors’ meetings from the related entity.  

(2) Maryland may be considered an out-of-state entity’s principal place of business if that entity lists a Maryland address on its tax forms and stores business records primarily at its Maryland location.

(3) When the sole shareholders and directors of business entities sign an agreement that addressed the ownership of those entities, the entities are bound by that agreement.

(4) An oral employment contract that lasts for one year is not enforceable under Florida law if it is not reduced to writing and signed by the party against whom it is sought to be enforced.  When a contract contemplates a one-year employment relationship, performance is not deemed complete when a superseding agreement is formed within that one-year period. 

(5) A contract is not void as contrary to public policy unless its illegality is clear and certain.

(6) Under West Virginia law, a contract may be enforceable when the language of an agreement indicates that the parties fully intend to be bound, but they contemplate a more elaborate formalization of the agreement.  The formalization of the agreement is not a condition precedent to the agreement unless the parties expressly indicate as much.

(7) Judicial dissolution may be proper when there is illegal, oppressive or fraudulent action by majority shareholders with respect to minority shareholders.  Under Maryland law, conduct is oppressive when it substantially defeats the reasonable expectations held by minority shareholders in committing their capital to the enterprise. 

(8) Financial accounting is an available remedy when shareholder oppression is present. 

Facts:  Daughter and Father were each 50% owners of Company 1, based in West Virginia, and Company 2, based in Maryland, which owned and managed a West Virginia summer camp (the “Camp”).  As Father contemplated leaving the summer camp business, he and Daughter wanted to add a European partner to help Daughter run the Camp.  Father and Daughter believed that Plaintiff, a Spanish national, could help with the Camp’s revenue by recruiting European children from wealthy families.  Plaintiff had attended the Camp as a camper and a counselor for about 20 years.

On December 7, 2010, Father, Daughter and Plaintiff met in Florida to discuss Plaintiff’s possible involvement with the camp.  They discussed the Camp’s debt, liabilities and size, but Father and Daughter did not correct Plaintiff when he presented inaccurate figures.  According to Plaintiff, the parties agreed that Plaintiff would work for $72,000 annually to recruit European campers, and if this worked out well, Father would sell Plaintiff his 50% share of the Camp.  Daughter could also make Plaintiff her full partner at any time during this first year.  Father, on the other hand, insists that he told Plaintiff that he would need to work successfully with Daughter for one year before he would sell his interest to Plaintiff.  The meeting minutes indicated that Plaintiff would work as an employee for at least one year, after which there would be an evaluation and an opportunity for Plaintiff to obtain shares of the company “if everything goes well.”  However, in the course of working with the Camp, Daughter soon began referring to Plaintiff as her “partner.”  In January 2011, Plaintiff and Daughter formed a new business entity, Company 3, to recruit more campers from Europe.

In January 2011, Father executed a promissory note naming him and Company 2 as jointly responsible for a $350,000 loan that had apparently been made to him in 2009 and which he had not disclosed to Plaintiff.  Plaintiff was also unaware of other issues, such as lawsuits against the Camp, Father and Daughter’s commingling of personal and Camp funds, and the true acreage of the Camp.

   

To secure a visa for Plaintiff to work in the United States, Plaintiff and Daughter were each advised to contribute $55,000 to Company 3.  Plaintiff invested $55,000 of his personal funds in Company 3, but Daughter contributed nothing.  Still, Plaintiff and Daughter each received half Company 3's stock shares.  Daughter also transferred the $55,000 Plaintiff had invested in Company 3 to Company 2, explaining to Plaintiff that the money was being borrowed for Camp expenses.  Daughter told Plaintiff that the $55,000 would be credited toward Plaintiff’s eventual purchase of the Camp from Father.

During the summer of 2011, Plaintiff worked at the Camp.  Father and Daughter were displeased with Plaintiff’s work.  Plaintiff also learned for the first time that two different companies, Company 1 and Company 2 owned the Camp, and that the Camp struggled to pay its bills on time.

Plaintiff, Father and Daughter met in June 2011 to discuss committing the partnership agreement between Plaintiff and Daughter to writing.  Father and Daughter continued to refer to Plaintiff as Daughter’s “full partner in the Camp” and assured Plaintiff that the Camp was doing well financially, though they did not disclose the extent of the Camp’s liabilities or cash-flow related challenges.  In August 2011, Daughter asked Plaintiff to lend $50,000 to the Camp to cover a cash-flow shortage.  Plaintiff did so, thereby depleting his life savings.

 

In late August 2011, the three met again to discuss various issues concerning the partnership.  They drafted and all signed a document called Partnership Stock Agreement (“PSA”) at that time.  Nevertheless, Father subsequently contended that this was a letter of intent contemplating a formal agreement in the future, and that he still needed to evaluate Plaintiff’s involvement, particularly given that the one-year vetting period had not been completed and he was not happy with Plaintiff’s performance during the summer.

   

The August 24, 2011 PSA included several terms.  Plaintiff was to pay $50,000 per year for ten years to purchase 50% stock in Company 1 and Company 2.  $50,000 of the %55,000 that Plaintiff invested in Company 3 was to be credited toward his stock purchase.  The PSA provided other terms, such as agreement as to the manner in which to invest profits and limits on expenditures requiring consent from the other partner.  The PSA's final term stated that “[a]fter this agreement, a due diligence of the company and the additional legal papers required for the transaction will be made.”  No stock certificates or other legal documents were executed at that time, but when Plaintiff encountered other legal troubles, Daughter faxed documentation of Plaintiff’s investment and part ownership in the Camp from the Camp’s Maryland office. 

Plaintiff’s relationship with Father and Daughter deteriorated in late 2011.  Plaintiff learned that the Camp’s appraised value was $2.9 million instead of the $6 million he was led to believe it was worth.  Daughter prevented Plaintiff from having input on the business plan and accessing the financial records.  Plaintiff also learned that Father and Daughter used Camp funds to pay for their personal expenses and commingled funds.  Nevertheless, Daughter asked Plaintiff to contribute more money and bring in more campers.  Meanwhile, Father’s wife had died, allowing him to become more actively involved in the Camp’s affairs both with respect to his time and access to additional capital.  Father expressed disappointment with Plaintiff’s work and inability to assume more of the debt, and eventually banned him from being present or involved in the Camp.  Plaintiff sued Father, Daughter, Company 1, Company 2 and Company 3 (collectively, “Defendants”), alleging breach of contract and other causes of action.  Defendants moved to dismiss, which the court treated as a motion for summary judgment, and Plaintiff filed a cross-motion for summary judgment. 

Analysis:  Company 1, which was organized and ostensibly based in West Virginia, moved to dismiss, arguing lack of personal jurisdiction in Maryland.  Maryland’s Code, Courts and Judicial Proceedings § 6-103(b)(1) provides that a court may exercise jurisdiction over a defendant “who directly or by an agent . . . [t]ransacts any business or performs any character of work or service in the State.”  By showing that Daughter faxed Plaintiff documents indicating his stock ownership from the Maryland office and conducted certain meetings and operations there, Plaintiff made a prima facie showing of personal jurisdiction.  Moreover, although generally the contacts of one entity are not imputed to its affiliate, an exception is found when the affiliates fail to maintain separate books and records, accounting procedures and directors’ meetings.  Because there was significant overlap between the books and records of Company 1 and Company 2, a Maryland company, it was not unreasonable to impute Company 2’s Maryland contacts to Company 1.  Finally, the exercise of jurisdiction was “constitutionally reasonable” because it wasn’t “so gravely difficult and inconvenient as to place the defendant at a severe disadvantage in comparison to his opponent.”  CFA Inst. V. Inst. of Chartered Fin. Analysts of India, 551 F.3d 285, 296 (4th Cir. 2009).  For example, Daughter, a half-owner and officer of Company 1 was a resident of Maryland, and Company 1 had retained the same lawyers as the other defendants.  In fact, because Company 1’s tax forms listed a Maryland address, and the business records were stored in the Maryland office except when Camp was in session during the summer, the evidence supported a finding that Company 1’s principal place of business was in Maryland. 

The court addressed four of the Defendants’ arguments relating to breach of contract.  First, Company 1 and Company 2 argued that they were not bound by the PSA because Father and Daughter signed as individuals, not on behalf of the companies.  Second, Defendants argued that the statute of frauds barred enforcement of the December 2010 employment agreement.  Third, they argued that the employment agreement was illegal or against public policy.  Fourth, they argued that the alleged agreement contained conditions precedent and therefore was not binding.

The court summarily dismissed the first argument by saying that because the subject of the PSA was the ownership of Company 1 and Company 2, and because Father and Daughter were the only two shareholders of both companies, it was clear that Father and Daughter signed on behalf of Company 1 and Company 2.

The court agreed with the second argument concerning the statute of frauds by interpreting Florida law.  The oral employment agreement arose from a meeting of Plaintiff, Father and Daughter in Florida, so Florida’s statute of frauds applied.  Florida law requires that any agreement that cannot be fully performed within one year of creation to be reduced to writing and signed.  The statute of frauds barred enforcement of the December 2010 employment agreement, which completed Plaintiff’s employment for one year beginning in January 2011.  Moreover, the court rejected Plaintiff’s argument that the employment agreement had been fully performed in light of the August 2011 PSA, because Daughter had effectively made him a partner.  Because Plaintiff’s own complaint referred to the oral agreement as “an oral agreement that was to last one year,” the court granted summary judgment for Defendants on the breach of contract claim. 

The court rejected the third argument regarding terms contrary to public policy.  First, the court observed that contracts should not be held unenforceable for public policy grounds unless their illegality is clear and certain.  The court found no merit in Defendants’ argument that it would have been illegal for a partnership to replace a corporation, as Plaintiff could have been both a partner and a shareholder in Company 1 and Company 2.  The court also rejected Defendants’ argument that the contract was unenforceable because a “nonresident alien” may not own stock in an S corporation pursuant to 26 U.S.C. § 1361(b)(1)(C).  A nonresident alien’s purchase of stock in an S corporation is not illegal, but rather it causes the entity to lose its tax status as an S corporation.  Finally, the court rejected Defendants’ argument that the PSA was illegal and unenforceable because Plaintiff’s E-2 visa authorized him to work in the United States for Company 3, not Company 2 or Company 1.  This argument failed because the PSA did not call for Plaintiff to work in the United States, but rather he was to work in Europe recruiting campers, and the agreement did not call for the violation of the terms of his visa. 

As for the conditions precedent argument, the court found that summary judgment was improper on that ground.  Because the PSA was written and signed in West Virginia, the court applied West Virginia law on the existence of a contract.  The court noted that nothing on the face of the PSA indicated that it was a letter of intent and not a contract.  Moreover, even if the PSA were construed as a “preliminary agreement,” it would still be enforceable.  Under West Virginia law, there are two types of binding preliminary agreements, called Type I and Type II.  Type I is a complete agreement in which the parties fully intend to be bound, but they contemplate a more elaborate formalization of the agreement.  See Burbach v. Broad Co. of Delaware v. Elkins Radio Corp., 278 F.3d 401, 407 (4th Cir. 2002).  By contrast, Type II agreements do not fully commit the parties to the ultimate contractual objective, but they commit the parties to negotiate the open terms in good faith within an agreed-upon framework.  See id. at 408.  The court found that the PSA was a Type I preliminary agreement, as its language, “[a]fter this agreement, a due diligence of the company and the additional legal papers required for the transaction will be made,” states that the agreement only needed to be formalized.  Because the parties did not express their intent for the formalization to be a condition precedent, the court would not construe it as such. 

Summary judgment was denied with respect to Plaintiff’s shareholder oppression claims.  The claim against Company 1 arose under West Virginia law, and the claim against Company 2 arose under Maryland law.  Both states’ laws allow for the dissolution of a corporation when the directors or controlling parties act in a manner that is illegal, oppressive or fraudulent.  The court observed that majority shareholders of a corporation have a fiduciary duty to the minority shareholders, which requires the former to exercise good faith and fair dealing toward the latter.  In West Virginia, when a majority shareholder acts to “freeze or squeeze out” a minority shareholder from deriving any benefit of his investment without a legitimate business purpose, oppressive conduct may be found.  In Maryland, oppression is conduct that “substantially defeats the reasonable expectations held by minority shareholders in committing their capital to the particular enterprise.”  Bontempo v. Lare, 119 A.3d 791, 804 (Md. 2015).  The court rejected Defendants’ argument that Plaintiff was not a shareholder of Company 1 or Company 2, because Daughter provided Plaintiff with documentation that he had contributed capital and was a 10% shareholder of both companies.  Summary judgment on this claim was therefore improper. 

The court further observed that both West Virginia and Maryland law provide for accounting as a form of relief against shareholder oppression.  Because there was evidence that Plaintiff was a shareholder of Company 1 and Company 2, summary judgment on the accounting claim was denied. 

The full opinion is available in PDF.