Bartenfelder v. Bartenfelder (Ct. of Special Appeals)

Filed: July 2, 2020 

Opinion by: Judge Steven B. Gould 

Holding: 

In the absence of a petition for dissolution, demand for appointment of a receiver does not trigger the statutory right, under §4-603(a) of the Corporations & Associations Article of the Maryland Code, to purchase the complainant’s stock in the subject company.

Facts: 

Appellant (“Aggrieved Shareholder”, or “Aggrieved”) and Appellee (“Continuing Shareholder”, or “Continuing”) were the sole shareholders in a two Maryland close corporations and one Maryland LLC (the “Businesses”).  In February 2017, Aggrieved Shareholder filed a complaint in the Circuit Court for Harford County against Continuing Shareholder and the Businesses, alleging malfeasance by Continuing and requesting (1) injunctive relief in the form of appointment of a receiver to prevent Continuing’s further alleged malfeasance and to conduct forensic accounting in order to detect past malfeasance, (2) an award of damages, expenses, attorney’s fees, and costs, and (3) declaratory relief in the form of a finding that certain of Aggrieved’s actions related to the Businesses were lawful.

Continuing Shareholder considered receipt of the complaint to have triggered his right under CA §4-603(a) to acquire Aggrieved Shareholder’s shares in the Businesses, answering with a request to stay dissolution in order to determine the fair value of Aggrieved’s interests, and enforce his election to purchase Aggrieved’s shares.

In January 2018, Aggrieved Shareholder amended her complaint to add breach of contract claims and other injunctive relief and damages. 

In April 2018 the Circuit Court for Harford County agreed that the statutory right had been triggered and ruled that appraisers be nominated and appointed, and proceedings stayed until the valuation process had concluded.  Aggrieved Shareholder filed motion for reconsideration which was denied, and then filed notice of appeal.

In June 2019, Aggrieved Shareholder filed for bankruptcy, resulting in automatic stay of all litigation.  That month, the appraisers determined Aggrieved’s interest in the two close corporations to be $560,000.  In November 2019, the circuit court granted Continuing Shareholder’s motion to confirm the appraisal and further ordered Continuing to pay to Aggrieved two installments of $280,000.  The court granted leave for Continuing to escrow the installments with the court, to be disbursed only on court order.  Aggrieved appealed in December 2019. The circuit court in February 2020 declared Continuing to have satisfied the payment obligations.

In May 2020, the Court of Special Appeals consolidated the two appeals.

Analysis: 

The first threshold issue before the Court was whether to dismiss the second appeal on grounds of mootness; whether the passage of the valuation process and satisfaction of Continuing Shareholder’s ensuing payment obligations had rendered the controversy moot due to the fact that Aggrieved Shareholder had filed for bankruptcy, making the proceeds subject to claims by creditors and therefore unavailable to repurchase the shares.  The bankruptcy court in September 2019 had lifted the stay of the instant litigation, but ordered enforcement of judgments against Aggrieved to remain stayed.  Because the funds Continuing Shareholder deposited with the circuit court remained there, subject to the stay and unavailable to Aggrieved, the Court found the second appeal not to be moot and denied its dismissal.

The second threshold issue before the Court was jurisdictional; because Aggrieved Shareholder’s initial and amended complaints had asserted claims related to the LLC but the circuit court’s orders had applied only to claims related to the close corporations, the decision had not adjudicated all claims, rights and liabilities of the parties to the action and had not resulted in a final judgment.  The Court noted, however, that statutory exceptions to the final judgment rule, enumerated in CJP §12-303 allowed for interlocutory appeal of orders “for the sale, conveyance, or delivery of…personal property or payment of money…”.  Because the circuit court’s second order compelled conveyance of Aggrieved’s personal property (shares in the close corporations) and payment of Continuing's money ($560,000), and its first order meritoriously intertwined with the second, the Court found both interlocutory orders to be properly reviewable on appeal.

The Court subsequently turned to the substantive issue on appeal, whether the purchase right under CA §4-603(a) had been triggered by Aggrieved Shareholder’s complaint for appointment of a receiver.  That statute provided:

Any one or more stockholders who desire to continue the business of a close corporation may avoid the dissolution of the corporation or the appointment of  a receiver by electing to purchase the stock owned by the petitioner at a price equal to its fair value. (emphasis added)

Success in the argument would turn on whether CA §4-603(a) applied to any kind of receiver (statutory or equitable), whether CA §4-603(a) applied only to situations where a receiver had been appointed in a dissolution proceeding, or whether  Aggrieved Shareholder’s plea for appointment of an equitable receiver was tantamount to a statutory receiver.

The Court briefly paused to explain the dilemma affecting “trapped” shareholders in close corporations: with no liquid market for shares, no board of directors, and transfer of shares made possible only on unanimous consent), a shareholder desiring to exit the company is suddenly pit against their partners and left with few options.  Such a shareholder can risk accepting a lower price per share in order to gain unanimous consent, or they can invoke dissolution and either end the going concern or be bought out.

The Court next turned to construe the meaning of CA §4-603: its plain language if clear while read in context of the surrounding statutory section(s); but with other indicia of intent if ambiguous (such as structure, caption, relationship to other laws, legislative history, and purpose, e.g.).  Citing to both CA §4-602 (Involuntary dissolution) and CA §4-603 (Avoidance of dissolution by purchase of petitioner’s stock), the Court made four general observations.

First, the Court pointed out that the captions had been written by the General Assembly and were part of the bills considered prior to enacting the statute, giving weight to the argument that CA §4-603(a) was intended only to apply in situations where a shareholder sought to avoid dissolution.

Second, the Court found the plain language of CA §4-603(a) confirmed the intent espoused by the caption, implying an option (1) created for shareholders who desire to continue the business of a close corporation and (2) one made necessary to spare the business from extinction.

Third, CA §4-603 routinely used the words petition or petitioner, which could only be read logically in conjunction with CA §4-602 as the shareholder/petitioner seeking dissolution in CA §4-602(a).

Fourth, the exchange of shares for value contemplated by CA §4-603 was only possible after a determination of fair value, defined by CA §4-603(b) as occurring on the close of business on the day when the petition for dissolution is filed.

If CA §4-603(a) only operated in the context of dissolution proceedings, did the phrase “or the appointment of a receiver” retain any meaning?  To find an answer, the Court looked to Title 3 of the Corporations & Associations Article, specifically CA §3-413 and §3-414 which defined grounds and process for involuntary dissolution proceedings.  CA §3-414 provided for the appointment of two types of receivers: a temporary receiver to operate the business pending final determination as to dissolution, and a liquidating receiver charged with the dissolution of the company.  Answering its question in the positive, the Court supposed a scenario in which the non-petitioning shareholder might opt to exercise the purchase right rather than suffer a perceived intrusive or meddlesome court-appointed temporary receiver.

Next examining the legislative history, the Court was further persuaded that the CA §4-603(a) purchase right only applied in dissolution proceedings, pointing to its own discussion of the legislative history in Papillo (199 Md. App. at 86), as well as the re-codification in 1975 of the Annotated Code which separated a single section, Article 23 §109 Judicial Dissolution – Close Corporations, into now CA §4-602 and CA §4-603, thus revealing the original legislative intent that they be construed together.  Under the express language of the original text, the buy-out right existed only in a dissolution proceeding.

Finding that CA §4-603(a) applied only to statutory receivers and only in the context of a dissolution proceeding, the Court turned to the last question: was CA §4-603(a)  invoked by a shareholder requesting appointment of an equitable receiver with powers authorized by CA §3-414?  The Court, noting that dissolution consisted of a particularly harsh irrevocable and “all or nothing” remedy, indicated that it had recommended equitable remedies short of dissolution in relevant Maryland caselaw, particularly the appointment of a non-liquidating receiver to continue the operations of the corporation for the benefit of all shareholders.  Aggrieved Shareholder, then, was entitled to seek an equitable remedy short of dissolution without triggering the CA §4-603(a) purchase rights.

The Court noted that while equitable receivers had broad applicability (partnership disputes, mortgagor-mortgagee disputes, divorce proceedings, e.g.) and enjoyed a long history, dating back to the chancery courts of England, such appointments were to be reserved for extraordinary circumstances involving fraud, danger of spoliation, or imminent prospect of loss or injury to property.  An equitable receiver’s authority did not extend to dissolution, which was only granted by statute to a receiver appointed to wind up the corporation’s affairs.

Accordingly, finding that Aggrieved Shareholder’s complaint requested appointment of an equitable receiver vested with authority to operate the Businesses, not to liquidate them, her complaint did not invoke dissolution, did not invoke Continuing Shareholder’s CA §4-603(a) purchase right, and did not compel Aggrieved’s transfer of shares to Continuing.  A shareholder who seeks equitable relief to stop alleged oppression should not have to do so at the risk of being forced to sell her shares to the alleged oppressor.

The Court denied the motion to dismiss, reversed the lower court's orders and ruling, and remanded to the circuit court.

The full opinion is available in PDF.

Penchuk v. Grant (Cir. Ct. Mont. Co.)

Opinion by: J. Anne Albright 

Holding:

Shareholders’ ratification of a board’s merger decision is valid where the shareholders were informed of the deal provisions at issue, and where the Plaintiff failed to explain how disclosing certain pieces of financial information would have altered the “total mix” of information available to shareholders.

Facts:

Plaintiff Walter Penchuk is a common stockholder of CYS Investments, Inc., a Maryland publicly-traded corporation that invests in residential mortgage pass-through certifications (the "Corporation"). In June 2018, the Corporation announced a proposed merger with Two Harbors Corporation, a real estate investment trust and also a publicly-traded Maryland corporation (the "REIT"). The Corporation and the REIT filed a joint proxy statement and two supplementary Form 8-Ks. In July, on the recommendation of the Board and by a majority vote of the shareholders of Corporation, the merger was consummated, and the Corporation became a wholly owned subsidiary of the REIT.

The Corporation's board had formed a special committee comprised of several of its directors to evaluate the merger proposals  — five bids in total, including the REIT's. As they narrowed down the bids to that of REIT, they negotiated the following conditions with REIT: an exclusivity period in exchange for three director appointments; that the transaction be taxable to the Corporation's shareholders; a non-solicitation provision; access to nonpublic information about competing proposals; a right to amend or match the offer; and a $43.2 million dollar termination fee.

Plaintiff filed a class action lawsuit against the Corporation (later dropped) and eight of its Directors (collectively, the "Defendants"), claiming a breach of fiduciary duty. The Plaintiff argued that these provisions amounted to onerous deal protections and a conflict of interest for the directors, and yielded inadequate consideration for the transaction, especially when considered in light of the Corporation's past financial performance. 

Defendants filed a motion to dismiss, and Plaintiff filed a second amended complaint, claiming failure to disclose one pro forma projection and two distributable cash flow projections, thus preventing the shareholders from making an informed decision about the merger. In their motion to dismiss, Defendants claimed, first, that venue is improper under the Corporation's amended bylaws and, second, that the business judgment rule protects their decision, as does the subsequent ratification of their decision by a majority of the shareholders.

Analysis:

First, Defendants argued that the Corporation's bylaws were amended to limit venue to Baltimore courts. The Court held that the amendment was invalid, citing Maryland Code Ann. Corps & Ass'ns section 2–110(a), which provides that a Corporation may not enact a provision that is inconsistent with Maryland law. Under Maryland law, a claimant may bring a claim against non-resident defendants in any county in Maryland. Md. Cts. & Jud. Proc. section 6–202(11).  Here, Defendants are non-Maryland residents, and its bylaws are inconsistent with the venue statute.  Defendants had argued that a change in the Corporations & Associations article permitted limiting shareholder claims to a particular venue in Maryland, but the Court's review of Maryland Corporations & Associations Article section 2-113 concluded that the statute permitted limitation on jurisdiction to a particular court system, but not as to venue of a specific court location within a jurisdiction.  The Court concluded that the legislative history for the section did not support an interpretation of it as permitting a limitation on venue.

Next, a shareholder's a valid claim for breach of fiduciary duty is extinguished when a majority of informed, disinterested shareholders vote to ratify a merger. In support, the Court cited long-held Maryland case law and Corwyn v. KKR Financial Holdings LLC, 125 A.3d (2015), which emphasized the requirement of “fully informed, uncoerced votes”. Maryland applies a materiality standard to disclosures to shareholders in advance of a merger (as does Delaware, and as is used in federal securities laws). A fact is considered a material only if there is a substantial likelihood that its disclosure would be viewed by a reasonable investor as significantly altering the total mix of information; for example, facts that would affect decisions to buy, sell or hold a company’s securities or affect a company‘s value. The burden is on a plaintiff to meet the materiality standard and explain how the facts at issue would have affected the total mix. Here, Plaintiff failed to meet the burden. First, the “onerous deal protections“ were disclosed to the shareholders. Second, as for the projections that were not disclosed, Plaintiff failed to specify how they would have significantly altered the total mix. Mere conclusory allegations are insufficient.

The Court therefore denied the Defendants' motion to change the venue, but granted its motion to dismiss with prejudice Count I of the Plaintiff's Complaint.

A pdf of the opinion is available here.

Atlas Master Fund, LTD. v. Terraform Global Inc. (Cir. Ct. Mont. Co.)

Filed:  January 3, 2019

Opinion by:  Judge Rubin

Holding:  To determine whether a claim under the Securities Act of 1933 adequately alleged omissions from a registration statement, a court will review whether there is a substantial likelihood that the disclosure of the omitted information would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.

Facts:  A Delaware corporation (the “Company”) with its principal office in Bethesda, Maryland, was formerly controlled by its sponsor/parent (“Parent”) in a YieldCo structure.  A YieldCo is a tax-efficient financing structure that exists largely to benefit the sponsor, by allowing “the sponsor to tap the public equity markets without giving up control of the underlying assets.”  The Company completed an IPO on July 31, 2015 at $15.00 per share of common stock.  The Company’s stockholders were paid $5.10 per share when it was acquired by a third party in December 2017.  Plaintiffs are investment funds that bought shares in the IPO and brought suit alleging the loss in value in the span of two years, resulted in large measure, from material representations and omissions in the Company’s registration statement. 

The registration statement provided that any material transaction between the Company and Parent would require the approval by the Company’s conflicts committee, which was composed entirely of independent directors (the “Conflicts Committee”).  On November 20, 2015, the Company’s board allegedly terminated the two members of the Conflicts Committee following the Committee’s failure to approve a transaction requested by Parent.  Later the same day, three new members were added to the Company’s board and approved the transaction. 

The registration statement also provided an assurance that Parent, which borrowed money to purchase and develop the assets it sold to the Company, had adequate capital and access to the capital markets to make acquisitions and to develop projects.  Plaintiffs alleged the registration statement failed to disclose that, at the time of the IPO, Parent needed a $169 million loan to satisfy an undisclosed margin call related to an earlier acquisition by Parent.  While the loan closed after the IPO in August 2015, plaintiffs alleged the terms were known before the offering.  The interest rate exceeded the disclosed average annual interest rate by 500%. 

The defendants, which included the Company and persons who served as officers and directors of both the Company and Parent, filed a motion to dismiss arguing that the plaintiffs failed to plead viable claims for relief under the Securities Act of 1933.

Analysis:  With respect to alleged omissions from a registration statement, a court will review whether there is a “substantial likelihood that the disclosure of the omitted [information] would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”  Under circumstances where a registration statement contains both seemingly accurate and inaccurate information, “the Supreme Court has cautioned that ‘not every mixture with the true will neutralize the deceptive.  If it would take a financial analyst to spot the tension between the one and the other, whatever is misleading will remain materially so, and liability should follow.”

The Court found factual questions existed whether the registration statement was misleading with regard to each of the following aspects: (a) the Conflicts Committee, which was represented to be an effective control against self-dealing by Parent; (b) Parent’s then-existing financial condition and ability to raise capital to acquire and fund drop-down projects; and (c) Parent’s ability to disengage from the YieldCo model and decline to drop-down projects to the Company if Parent could get a better deal elsewhere. 

Conflicts Committee.  The Court stated that while the registration statement disclosed Parent’s ability to appoint all of the Company’s directors, including members of the Conflicts Committee, “a fair reading of the registration statement makes it seem that there would be a meaningful check in place to block overreaching by Parent regarding drop-downs.  No rational investor would equate the power to appoint [the Company’s] directors with the power to sack an independent Conflicts Committee, at will, and replace it with loyalists, the first time [the Company’s] Conflicts Committee rejected” a proposal. 

Parent’s Financial Condition.  The plaintiffs alleged that, although the loan closed in August 2015 after the IPO, the terms were known before the offering.  Plaintiffs conceded that the registration statement warned generally about the Company’s dependence upon Parent, and need for liquidity.  The Court stated that a registration statement may be misleading if “it fails entirely to disclose a material risk that is already known by the company” and concluded that it is a reasonable inference that certain defendants “knew of these impending, and imminent material financial events on July 31, 2015.”  The Court noted that the registration statement did not disclose the Parent’s need to secure the $169 million loan, which “likely would have alerted potential investors of material risks, otherwise unknown to the public.”  The Court disagreed with defendants’ contention that the Company had no duty to disclose any information about Parent’s financial condition, even if it knew about it, due to the YieldCo structure and the Company being completely controlled by Parent.

Ability to Disengage.  The Court recognized this part of plaintiffs claim as being more tenuous.  While the registration statement did not say that Parent could, at will, simply abandon the Company, “the offering documents did say that neither party was required to buy or sell any project, or to do so on any particular terms.”  Giving plaintiffs the benefit of all favorable inferences, the Court was disinclined to dismiss this part of the claim. 

The Court denied the motion to dismiss.  The Court also discussed the doctrine of class action tolling.  

The opinion is available in PDF.

Willow Grove Citizens Assoc. v. County Council of Prince George's County, Maryland (Ct. of Special Appeals)

Filed:  December 20, 2017

Opinion by:  Stuart R. Berger

Holding:  A Maryland LLC’s participation in an administrative proceeding by filing for a zoning special exception was valid even though the LLC had forfeited its right to do business in Maryland.  A foreign unregistered corporation's participation in the proceedings as agent or co-applicant did not invalidate the application because the isolated action did not constitute doing business in Maryland.

Facts:  Appellee (“LLC”) in 2001 purchased a parcel in Bowie, Maryland with the intent to construct an assisted living facility.  The parcel being zoned "Rural Residential," prior owner had obtained a special exception for this same purpose but had never developed the land.

In 2012, LLC neglected its State Department of Assessments and Taxation ("SDAT") obligations and forfeited its right to use its name and do business in Maryland.  LLC's sole member was a corporation organized in the District of Columbia not registered to do business in Maryland.  LLC's rights remained forfeited in February 2014 when it applied for a special exception to operate an assisted living facility on the parcel.

The application was accepted, heard, and granted in October 2014 by the local planning commission ("Examiner").  People's Zoning Counsel, appointed by the County Council to protect the public interest and create a full and complete record, was the same attorney who had conducted the settlement and subsequent contract work around the sale of the parcel to LLC.  The record showed no objections made after his disclosure of prior involvement and no objection to his participation in the proceedings.  Examiner's decision was appealed to the County Council who remanded the matter for a determination of LLC's standing with SDAT.

In May 2015, LLC's rights were reinstated, and a month later the sole member became a qualified corporation in Maryland.  LLC provided certificates of good standing at the subsequent rehearing where the Examiner recommended approval.   Appellant, a civic association ("Citizens"), appealed to the County Council, who found LLC legally authorized to file an application for a special exception concerning real or personal property, that forfeiture had not impaired the validity of such a filing, and that the act of applying for a special exception did not constitute doing business.  The Circuit Court for Prince George's County affirmed.

Analysis:  Because Citizens accepted the factual record and objected only to the decision of the County Council on legal grounds, the only question before the court was whether the approval for special exception had been premised on legally erroneous conclusions of law.

Evaluating Citizens' claim that LLC's actions in pursuit of a special exception were a legal nullity, the court pointed to § 4A-911 of the Corporations & Associations Article (emphasis added):

The forfeiture of the right to do business in Maryland and the right to the use of the name of the limited liability company under this title does not impair the validity of a contract or act of the limited liability company entered into or done either before or after the forfeiture, or prevent the limited liability company from defending any action, suit or proceeding in a court of this State.

Irrespective of its forfeiture, LLC remained a legal entity with the power to enter binding contracts at any time.  What of the statute's proscription against bringing lawsuits?  Continuing on, the court found that because LLC had not filed its application "in a court of this State," the implicit prohibition against initiating suits was irrelevant.

"What about the sole member's initial status as an unregistered corporation?," pressed Citizens.  Applying a similar analysis, the court cited § 7-103 of the Corporations & Associations Article to find unregistered corporations to be entitled to engage in many in-state activities such as maintaining, defending, or settling actions, suits, claims, disputes, administrative or arbitration proceedings.  Citizens failed to meet their burden to prove the sufficiency of sole member's contacts or actions within the state to constitute "doing business,"  therefore, the sole member's status as co-applicant or agent in pursuing the special exception was also irrelevant. 

Finally, the court found that Citizens had not preserved for judicial review the question of People's Zoning Counsel's alleged conflict of interest because it failed to raise the issue at any stage of the administrative proceedings.

Accordingly, the court found the County Council's decision to approve the application for special exception to be correct as a matter of law.

The full opinion is available in PDF.

Gary W. Stisser v. SP Bancorp, Inc. (Ct. of Special Appeals)

Filed: November 29, 2017

Opinion by: Andrea M. Leahy

Holding: In a shareholder class action lawsuit for breach of directors’ fiduciary duties following a merger, Maryland did not have personal jurisdiction over directors of the company incorporated in Maryland, nor over the Texas-based merging company because under the jurisdictional analysis it is insufficient that the Texas-based merging company merely incorporated a subsidiary in Maryland to facilitate the merger but conduct no other business activity there, and mere directorship in a Maryland company is insufficient given the absence of factors such as: a director-consent statute, actual business activity in Maryland, and any merger-related activities directed toward Maryland.

Facts: Appellants are shareholders of a company incorporated in Maryland (the “Company”). Appellants filed a shareholder class action lawsuit for breach of fiduciary duties following the merger of the Company into a Maryland subsidiary (the “Maryland Subsidiary”) of a bank holding company incorporated under Texas law with its principal place of business in Texas (the “Holding Company”). The lawsuit named both the Company and its directors (the “Directors”), as well as the Holding Company and its Maryland Subsidiary, as the defendants. 

Appellants are not residents of Maryland. They owned shares in the Company. The Company was incorporated in Maryland, but its headquarters and principal place of business were located in Texas. The Company served as a holding company and parent of a Texas-chartered state bank. The Company did not have any offices in Maryland and did not employ any individuals in Maryland. The Directors did not reside in Maryland, nor were they employed there. The merger negotiations with the Holding Company took place in Texas. 

The Circuit Court for Baltimore City granted motions to dismiss by the defendants, finding in part that the Court lacked personal jurisdiction over the Directors and the Holding Company. The questions on appeal were whether the Holding Company subjected itself to personal jurisdiction in Maryland by forming the Maryland Subsidiary, and whether the Directors were subject to personal jurisdiction because they filed the Articles of Merger in Maryland.  

Analysis: Personal jurisdiction over out-of-state defendants must be established under Maryland’s long-arm statute and comport with the Due Process Clause of the Fourteenth Amendment. Appellants argued that Maryland had general jurisdiction over the Holding Company because it formed the Maryland Subsidiary as an instrumentality or alter ego, and exercised complete control over the Maryland Subsidiary until it was shuttered following the merger. Appellants did not argue the Holding Company was “at home” in Maryland under the traditional  general jurisdiction analysis. 

The Court held that the incorporation of and control over a subsidiary in Maryland is insufficient to establish general jurisdiction over the nonresident parent company, citing in support DaimlerChrysler AG v. Bauman, 134 S. Ct. 746 (2014). In Daimler, Argentine residents sued a U.S. subsidiary of a German parent company whose Argentine-based subsidiary allegedly collaborated in government war crimes. The Supreme Court rejected the establishment of personal jurisdiction over a parent company due merely to its control over a resident subsidiary. Thus, Appellants’ argument fails. 

Moreover, even if the Maryland Subsidiary were an alter ego of the Holding Company, the Holding Company would only be subject to personal jurisdiction upon a showing that it was “at home” in Maryland. Normally, this means the place of incorporation and principal place of business.  

The Court also rejected Appellants’ claim that the Holding Company’s actions of forming the Maryland Subsidiary and consummating the merger in Maryland subjected the Holding Company to specific jurisdiction.  The Court found that the Holding Company did not “transact business,” pursuant to Maryland’s long-arm statute, because the mere filing of the Articles of Incorporation of the Maryland Subsidiary are insufficient.  The Maryland Subsidiary was not intended to do business in Maryland and did not direct activities toward Maryland residents. The Holding Company did not have offices or solicit business in Maryland, nor did it appoint a registered agent there. Moreover, the filing of the Articles of Incorporation is only tangentially related to the underlying claims, and thus insufficient for specific jurisdiction. Additionally, the filing of the Articles of Merger is also insufficient because these were not filed by the Holding Company. 

The Court rejected the argument that by accepting directorship in the Company, the Directors are subject to personal jurisdiction in Maryland. The Maryland legislature never enacted a “director consent” statute which is necessary to provide prospective directors notice sufficient enough to satisfy the Due Process Clause in light of the Supreme Court’s ruling in Shaffer v. Heitner, 433 U.S. 186 (1977). The Court also held that the Pittsburgh Terminal Corp. v. Mid Allegheny Corp., 831 F.2d 522 (4th. Cir. 1987) ruling — which held that a director-consent statute is not always necessary because Shaffer did not require any particular statutory “words of art” — did not apply here because the Pittsburgh Terminal corporation actually did business in the forum state, unlike the Company here. 

The Court also rejected the Appellants’ argument that the Directors are subject to personal jurisdiction because the Directors caused the merger in Maryland and filed the Articles of Merger in Maryland. Appellants did not allege that the Directors directed any contact toward Maryland with respect to the merger. The Directors were non-residents who never entered Maryland in connection with Company business. The filing of the Articles of Merger was the only act that occurred in Maryland. The filing cannot be imputed to the Directors for jurisdictional purposes because the Directors did not file the Articles of Merger personally and did nothing more than participate in the merger decision.

The opinion is available in PDF here.

Farm Fresh Direct by a Cut Above, LLC v. Downey (Maryland U.S.D.C.)

Filed: October 26, 2017

Opinion by: Judge Ellen Lipton Hollander

Holding:

Under Maryland law, the liability protections afforded to limited liability company (“LLC”) members with respect to obligations of an LLC did not support dismissal of claims that an individual engaged in unfair competition and deceptive trade practices by forming and participating in an LLC, where the plaintiff alleged conduct supporting direct claims against the individual.

Facts:

A Maryland LLC, Farm Fresh Direct by a Cut Above LLC (“Plaintiff”), brought suit against multiple defendants, including another Maryland LLC, Farm Fresh Direct Home Food Services, LLC (“Defendant LLC”), and an individual who allegedly filed Defendant LLC’s Articles of Organization with the Maryland State Department of Assessments and Taxation (“Defendant Individual” and together with Defendant LLC, the “Defendants”), alleging that the Defendants engaged in unfair competition in violation of both Section 43(a) of the Lanham Act, codified at 15 U.S.C. § 1125(a), and Maryland common law, by establishing and engaging in a competing business under a name which was confusingly similar to the name of the Plaintiff.  The Defendant Individual moved, pro se, to dismiss the action.  Despite construing the motion liberally in favor of the Defendant Individual, the district court denied the motion, holding that the Plaintiff had alleged sufficient facts to satisfy the pleading requirements of Fed. R. Civ. P. 8(a).    

Analysis: 

The district court analyzed as a threshold issue whether the Defendant Individual was subject to suit in light of the Defendant LLC’s status as a Maryland LLC.  The district court’s analysis begins with a review of Maryland and Fourth Circuit law regarding the corporate shield and the corresponding LLC shield.  The court then notes that, notwithstanding the LLC shield, which generally protects LLC members from personal liability for obligations of the LLC, the LLC shield does not protect LLC members from direct liability for that member’s own actions.  Because Plaintiff alleged that the Defendant Individual formed the Defendant LLC and acted as its resident agent, the district court held that Plaintiff had alleged sufficient facts to plead direct claims against the Defendant Individual.  Further, because Plaintiff alleged that the name of the Defendant LLC was confusingly similar to the name of the Plaintiff and that the Defendant LLC engaged in substantially the same business as the Plaintiff, the district court held that Plaintiff alleged sufficient facts to plead claims of unfair competition and deceptive trade practices under Maryland and Federal law.  Accordingly, the district court denied Defendant Individual’s motion to dismiss.

The full opinion is available in PDF.

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

In re American Capital, Ltd. Shareholder Litigation (Cir. Ct. Mont. Cnty)

Filed: July 12, 2017

Opinion by: Ronald B. Rubin

Holding:  A claim that a transaction is subject to the entire fairness standard of review survives a motion to dismiss under Delaware law where a minority shareholder exercised actual control over corporate decision-making by apparently forcing a quick sale for its own short-term gain, threatening ouster of the board to pressure members to ignore other serious bids and alternative courses of action at better values, and demanding unique and unjustifiable compensation for the deal.

Facts: 

Plaintiffs are the common shareholders of American Capital Ltd. (the “Company”). Following a settlement with the Company’s directors and officers, the only remaining Defendant was a management corporation described as being an activist hedge fund. From 2014 to 2015, the Company’s board regularly considered strategic options for the Company and eventually decided on a plan to spin the Company off into a new business development company, which the Company would manage. On September 20, 2015, the Company announced the spin-off plan and requested shareholder approval.

On November 16, 2015, Defendant emailed the Company CEO reporting an 8.4% ownership interest in the Company, and stating their intention to file a preliminary proxy contesting the spin-off plan. This was followed up by a telephone call informing him of their intention to remove him, the management and the board. Shortly thereafter, Defendant sent a letter criticizing the management and board, an attack on the spin-off plan, and a press release. Defendant urged the Company to drop the spin-off plan, replace the board, and undertake a strategic review. Defendant also filed a proxy statement with the SEC contesting the spin-off and urging shareholders to vote against any proposal by the board. After threatening to publicly call for the resignation of the CEO, Defendant began to by-pass him in dealings with the Company.

Shortly thereafter, the Company announced the formation of a strategic review committee to review the Company’s prospects, including a possible sale. Defendant reported an increase in ownership to 9.1%, and on that same day, a Capital Corporation sent the CEO a letter urging the Company to enter into a transaction with them. Defendant made recommendations regarding the review and sought to meet with the committee and the Company’s investment bankers. It continued to demand a sale and to threaten to seek the replacement of the Company’s board and management. It provided a list of potential buyers and continued to report increases in its ownership. When the board announced the decision to solicit purchase offers, Defendant called it the right course of action. Defendant also requested that the Company postpone the annual shareholder meeting and director nomination deadline.

After the Capital Corporation made an unsolicited purchase offer, Defendant urged the Company to reach a deal as soon as possible. The Company’s financial advisers met with the Defendant’s representatives. Defendant encouraged the investment bankers to finalize the sale even if it meant selling at a loss. In February 2016, the Company proposed three alternative scenarios to a quick sale of the whole Company. The Company’s management believed the shareholders would receive greater returns through an orderly liquidation or by remaining a standalone company. Yet the Company’s board continued to push for a sale, as demanded by the Defendant. The board once again pushed back its annual meeting, which extended the deadline for the Defendant to file a competing proxy. Furthermore, the committee and investment bankers withheld the liquidation scenario projections from the Company’s board.

The Company received several bids to acquire it. Defendant signed confidentiality agreements with the Company affording it unfettered access to the review process, and with the Capital Corporation to view its bid information. In a meeting with the Company’s legal and financial advisers, Defendant expressed a strong preference for the Capital Corporation’s bid—even though other offers appeared to have a better value. It also expressed a preference for a quick sale over an orderly liquidation—even at a lower value.

Soon after, the Company’s board outright rejected a competing bidder who increased its proposal subject to an exclusivity provision. The Capital Corporation submitted a revised bid and negotiated a voting agreement to lock in Defendant’s support. Defendant threatened the Company that if it failed to settle with Defendant for its expenses and close the deal, the Company’s board would be reconstituted. When the Company tried to revise terms of settlement, the Defendant threatened another strategic review unless the sale closed.

In May 2016, a merger with the Capital Corporation was announced. The Company approved a settlement agreement on the following terms: if the deal did not close, the board members would be replaced by the Defendant’s selections, the chairman would resign, and another review would be undertaken. In exchange, the Defendant would not launch a proxy fight before the next annual meeting. The Company also agreed to pay the Defendant $3 million.

Defendant filed a Motion to Dismiss the Plaintiff’s Amended Complaint on the grounds that personal jurisdiction is lacking, and that the transaction is not subject to entire fairness review under Delaware law. The Court denied both Motions.

Analysis: 

Defendant satisfied the transacting business prong of the Maryland long-arm statute and the purposeful availment requirement of the Due Process clause because: the Company was headquartered in Maryland where it employed hundreds  (many of which were laid off due to the sale); Defendant initiated many calls to Maryland; Defendant triggered the process and events that led to the filing of the case when it sent the initial email (followed by many others) to the Company; and until the deal closed, Defendant enmeshed itself in the Company’s strategic review process and the board’s deliberations. These constitute repeated and intentional efforts towards the sale of a Maryland-based company. From the facts pleaded, it also appears that Defendant intentionally acquired a large portion of Company stock and increased it for a single purpose—to force a sale and make a short-term gain.

As for the substantive issue, Plaintiffs viewed the merger as the predictable result of Defendant’s pressuring the board to sell or be ousted. Defendant counters that the merger was the best value reasonably available, was vetted through a competitive bidding process, and that the Company’s board merely took the input of a large shareholder seriously.

Where, as here, a shareholder owns less than 50% of the Company’s stock, Plaintiffs must allege domination through actual control of corporate conduct. Under Delaware law, a minority shareholder is a controller if it has such formidable power that it exercises actual control over corporate decision-making. Here, Plaintiffs allege that Defendant was a controller for the specific purpose of forcing the sale, and that Defendant reaped unique benefits unavailable to the other shareholders. The controller test is a fact-based inquiry difficult to satisfy, but this case meets the threshold.

Here, the facts if proven would amount to actual control over the sale. No other shareholder received separate monetary compensation for the deal. The sale was already vetted by the financial advisers, and it is not clear what value Defendants added to merit the $3 million payment. The Plaintiffs adequately laid out the profit-making playbook for activist hedge funds, by forcing quick sales such as this one, which took only about six months.

Also, enough facts were pleaded to show that the board did not act independently. Defendant dominated the process and favored the Capital Corporation to the exclusion of other serious bidders that offered better long-term value. The board effectively took no actions to negotiate with those bidders. Collectively, the active role played by Defendant, the apparent willingness of bidders to pay a higher price, and the discount to book value of the stock gives credence to contention that the board knew the Capital Corporation undervalued the Company, but brushed this concern aside in order not to lose a proxy battle to Defendant. This amounts to a colorable claim of board domination. Thus, Plaintiffs sufficiently invoke the benefit of the entire fairness standard of judicial review.

The full opinion is available in PDF.

Bontempo v. Lare (Md. Ct. of Appeals)

Filed: August 6, 2015

Opinion by: Robert N. McDonald

Holdings:

(1) The standard for determining whether a minority shareholder has been “oppressed” by the majority is the shareholder’s “reasonable expectations” upon obtaining an ownership interest in the company. This standard does not, however, dictate the type of equitable relief a trial court must provide, unless it is to be dissolution of the company.

(2) A breach of fiduciary duty to a corporation does not constitute fraud, absent a finding of fraud by the court. In this case, the majority shareholder’s self-dealing was a breach of his fiduciary duty, but because it did not involve deception, it did not rise to the level of fraud. The requested remedies of dissolution of the company and an award of punitive damages were therefore denied.  

Facts: See prior summary of Bontempo v. Lare (Md. Ct. Spec. App.).

Analysis:

The Court agreed with the opinions of the Circuit Court and the Court of Special Appeals on the standard for determining whether a minority shareholder has been “oppressed”: The court should look to the shareholder’s “reasonable expectations” at the time of acquiring an ownership interest in the company. If oppression has occurred, then dissolution of the company can be a remedy.

The Court of Appeals found, however, that even upon a finding of oppression, other, less punishing remedies can also be considered. In choosing a possible remedy, the court should take into account other stakeholders who may be affected, including other shareholders, managers, employees, and customers.

In this instance, Plaintiff argued that he had a reasonable expectation of future employment when he acquired a stake in the company. He said his investment, in the form of sweat equity, should trump his status as an at-will employee. The Court said a “reasonable expectation” can be used to determine whether oppression has occurred but does not dictate what form of equitable relief a court should grant. In addition, reinstating Plaintiff as an employee would not have been a viable option because he and Defendant could not reasonably have been expected to run a business together.

A provision in the shareholder agreement requires an employee to sell his stock upon termination “for cause.” Plaintiff argued that this provision effectively created an employment agreement, overriding his status as an employee at will. The Court was unpersuaded by this argument as well, noting that a buy-out requirement when a shareholder-employee is terminated for cause does not imply that the individual may be terminated only for cause.

On another mater, Plaintiff asked the Court to reconsider his allegations of fraud, which the Circuit Court had denied. He argued that Defendant’s breach of his fiduciary duty to the company constituted fraud as to the company itself and to Plaintiff as an oppressed shareholder.

The Court affirmed the lower court’s finding, noting that although Defendant’s self-dealing did constitute a breach of his fiduciary duty to the company, he made no attempt to conceal the activity. The illicit personal expenditures from the corporation’s accounts were entered into the company’s books, to which Plaintiff had full access.

Plaintiff made his allegations of fraud in connection with seeking dissolution of the company and an award of punitive damages for his benefit. As to the request for punitive damages, the Court said that they are not available as an equitable remedy and that, in any event, a finding of fraud would not support an award of punitive damages.

The full opinion is available in PDF.

Bontempo v. Lare (Md. Ct. Spec. App.)

Filed: April 30, 2014

Opinion by: Douglas R. M. Zanarian

Holding:

(1) When a minority stockholder petitions a court for dissolution pursuant to Md. Code Ann., Corps. & Ass’ns § 3-413 (the “dissolution statute”), such stockholder’s rights will be informed by any existing stockholder agreement and, where there is no evidence of a deadlock of the board of directors or that the company is likely to become insolvent, the court has discretion under the statute to order alternatives to the extraordinary remedy of dissolution.

(2) The dissolution statute does not provide for personal liability, even if fraud is proven.

(3) The proper remedy when a court finds an officer or director has breached his or her fiduciary duties to the company by diverting money from the company for personal use is an order directing such officer or director to repay such money to the company, not an order requiring the company to declare equivalent distributions for all stockholders.

(4) An award of attorneys’ fees and expenses is only appropriate if the injured company has recovered a common fund.

(5) It is the trial court’s role to determine a party’s credibility and whether evidence is sufficient to support the existence of an oral contract.

Facts: Plaintiff became a minority stockholder of Quotient, Inc. (“Quotient”), a close corporation organized under Maryland law, in 2001. Plaintiff executed a shareholder agreement with the other stockholders of Quotient – the defendants, the Lares (a husband and wife collectively owning 55% of the stock in Quotient). In addition to being a director and officer of Quotient, Plaintiff was also an employee pursuant to an oral agreement with Mr. Lare, which Plaintiff alleged included that he would receive a salary equal to that of the Lares combined. In addition to certain “perks” (e.g., company credit cards for gas, meals and entertainment and a corporate fitness trainer), paid for by Quotient and received by Plaintiff and the Lares, the Lares began paying household employees from Quotient’s payroll account in 2006, advanced interest-free loans from Quotient to two companies in which the Lares had an interest and took a loan from Quotient for renovations to the Lares’ personal home. The relationship between Plaintiff and the Lares began to sour and in 2010 Mr. Lare terminated Plaintiff’s employment with Quotient after Plaintiff refused to voluntarily resign and sell his shares in Quotient. Plaintiff remained an officer and director of Quotient for six months after termination, however, and continued to receive distributions as a stockholder. Plaintiff filed suit against the Lares seeking relief pursuant to Maryland’s dissolution statute and asserted derivate claims on behalf of Quotient for imposition of a constructive trust, breach of fiduciary duty, and constructive fraud and a direct claim for breach of contract.

The trial court ruled in favor of Plaintiff as to his petition for dissolution; however, the trial court refused to dissolve Quotient and instead ordered Quotient to pay Plaintiff $167,638 in damages. The trial court also ruled in favor of Plaintiff as to his claim for breach of fiduciary duty and ordered that the misappropriated funds be treated as a distribution from Quotient and ordered Quotient to pay Plaintiff a proportionate amount, including attorney’s fees, but ruled in favor of the Lares as to Plaintiff’s claim for constructive fraud. The trial court ruled in favor of Plaintiff as to his claim for breach of contract and ordered Quotient to pay Plaintiff $81,818.18 in unpaid distributions, but refused to find an oral equal-compensation contract existed. Both parties appealed.

Analysis: The Court affirmed the holding of the trial court, including the trial court’s refusal to dissolve Quotient; however, it found that the trial court erred in how it allocated the damages.

Although the Court upheld the trial court’s finding, not contested on appeal, that Mr. Lare’s behavior met the standard for oppressive conduct, particularly his threat and ultimate firing of Plaintiff for refusing to voluntarily resign and sell his shares in Quotient, the Court also upheld the trial court’s conclusion that dissolution was not the only available remedy. The Court noted that it was Plaintiff’s status as a stockholder of Quotient, as defined by the shareholder agreement, that defined and bound the rights he was entitled to vindicate under the dissolution statute and the appropriate remedies. Unlike in Edenbaum v. Shcwarcz-Osztreicherne, 165 Md. App. 233 (2005), the Court noted that the shareholder agreement did not mention Plaintiff’s employment rights, thus the shareholder agreement did not give Plaintiff a reasonable expectation of employment or provide an enforceable to such. Instead, the Court found that Plaintiff was entitled to participate in distributions and the affairs and decisions of Quotient consistent with his status as a stockholder. Although Mr. Lare’s actions frustrated such rights, Plaintiff had resigned from Quotient’s board of directors and thus there was no evidence of a deadlock justifying dissolution, nor was there any evidence to suggest that, despite the use by the Lares of Quotient’s funds for personal expenses, Quotient was likely to become insolvent. Therefore, the extreme remedy of dissolution was inappropriate.

The Court also held that the Lares could not be personally liable under the dissolution statute, even if their actions constituted fraud, because the purpose of that statute is to vindicate the reasonable expectations of minority stockholders, in such capacity, against oppression by majority stockholders. Plaintiff’s injury as a minority stockholder was lost distributions, and thus, Plaintiff was made whole by accounting to determine how much money the Lares diverted from Quotient and an order to pay distributions to Quotient stockholders based on the amounts diverted.

The Court also agreed that the Lares had breached their fiduciary duties as directors and officers of Quotient by diverting money from Quotient for personal use; however, the Court held that the trial court erred in ordering a distribution to all stockholders as a remedy. The Court noted that it was Quotient, not Plaintiff, who was harmed because it was Quotient’s money that was taken by the Lares and, thus, distributions would not make Quotient whole but would instead take more money from Quotient. The Court held that the appropriate remedy would have been ordering the Lares to repay Quotient for the money taken. Because such payment would result in a recovery by Quotient of a common fund, the Court noted that an award by the trial court on remand of attorneys’ fees and expenses would be appropriate under the common fund doctrine.

Despite holding that the Lares had breached their fiduciary duties to Quotient, the Court affirmed the trial court’s ruling in favor of the Lares as to Plaintiff’s claim for constructive fraud. Although constructive fraud usually arises from a breach of fiduciary duty, the Court noted that they are not equivalent and that “a director can breach fiduciary duties without committing fraud.” The Court found that, although the Lares had used bad judgment in using funds from Quotient for their personal expenses, they had not engaged in a long course of illegal or fraudulent conduct, especially since all of the transactions were recorded on the books of Quotient and Plaintiff had access to such books. For the same reason, the Court found that the Lares did not act with malice.

Finally, the Court found that the trial court committed no error in refusing to find that an oral equal-compensation contract existed between Plaintiff and Quotient. Although Plaintiff and his wife testified to the oral equal-compensation agreement and evidence showed that Plaintiff was paid a salary equal to the Lares for four years, there was also evidence that, for multiple years in the beginning and towards the end of his employment, the salaries of Plaintiff and the Lares differed significantly. The Court noted that it was the trial court that heard the evidence and it was not for the Court to determine on appeal whether the trial court gave appropriate weight to the parties’ credibility.

The full opinion is available in PDF.

TBC, Inc. v. DEI Holdings, Inc. (Maryland U.S.D.C.)

Filed: March 24, 2015

Opinion by: Catherine D. Blake

Holdings:

(1)   A corporate entity, in acquiring the assets of a predecessor, cannot be held liable solely based on continued use of a predecessor’s trade name, sale of a predecessor’s products, and retention of some of a predecessor’s accounts and employees.  

(2)   When a party does not allege facts to show that a corporate parent used its subsidiary “as a mere shield for the perpetration of fraud,” that party does not state a claim against the parent for the subsidiary’s obligations.

(3)   A party may state a claim for breach of contract without alleging perfect performance of its own obligations under the contract.

(4)   Maryland law does not recognize an independent cause of action for breach of the implied covenant of good faith and fair dealings.

(5)   A party may obtain restitution on the theory of unjust enrichment, despite the existence of an express contract, when the party breaches the express contract.

Facts:

Parent Defendant ("Parent") was the corporate parent of two subsidiaries, Subsidiary 1 and Subsidiary 2.  Additionally, four divisions of Parent were unincorporated until they formed LLCs in February 2014. 

Plaintiff, an advertising and public relations agency, was hired by Subsidiary 1, a consumer electronics vendor, to provide marketing services.  In 2011, Subsidiary 1 agreed to pay Plaintiff $12,500 each month for 83 hours of work per month.  In 2012, Subsidiary 2 hired Plaintiff under a similar agreement.  Plaintiff performed work beyond the monthly retainer for both entities and was paid additional fees accordingly. 

Subsidiary 1 later retained Plaintiff to perform advertising and marketing services for a new line of products on the terms outlined in the 2011 contract.  In 2013, Plaintiff worked 3,000 more hours than the 83 hours per month contemplated in the 2011 contract.  Despite this additional work, Plaintiff was paid monthly fees in 2013 based on the budgeted 83 hours per month.  Based on the experience of its leadership, Subsidiary 1 knew based on the nature of the requested work that it would require substantially more than 83 hours each month. 

In June 2013, Plaintiff’s Executive Vice President (the “VP”) met with three executives of Parent to discuss compensation for Plaintiff’s work in excess of the monthly budget.  The executives assured the VP that Plaintiff would be paid in full for the additional hours.  In August 2013, one of Parent's executives again told the VP that Plaintiff would be paid in full, and Plaintiff continued to perform more work until the Parent's executives informed the VP in January 2014 that Plaintiff’s services would no longer be needed.  Plaintiff was never paid for the 3,000 hours of additional work performed in 2013.

In February 2014, four LLCs (the “LLC defendants”) were formed from the four unincorporated divisions of Parent.  Subsidiary 1 also merged into Subsidiary 2. 

In September 2014, Plaintiff sued Parent, Subsidiary 1, Subsidiary 2 and the four LLCs alleging, inter alia, breach of contract, breach of the covenant of good faith and fair dealings, and unjust enrichment.  All defendants moved to dismiss. 

Analysis: 

(1)   The court first considered whether Plaintiff stated a claim against the LLC defendants.  Under the general rule of corporate successor liability, a corporate entity acquiring assets from another entity does not acquire the liabilities of its predecessor.  An exception is where the successor entity is a “mere continuation or reincarnation” of the predecessor entity.  The exception applies where there is continuity among directors and management, common shareholder interest, and, in some cases, inadequate consideration in the transaction.  Use of the predecessor’s trade name, sale of a predecessor’s products, and retention of the predecessor’s accounts and employees will not alone suffice.  Because the contracts predated the existence of the LLC defendants, and Plaintiff only alleged the latter three factors, Plaintiff failed to state a claim against the LLC defendants.

(2)   Next, the court considered Plaintiff’s claims against Parent.  In general, a parent corporation is not liable for the obligations of its subsidiaries.  The “corporate veil” may be pierced only in circumstances when it is necessary to prevent fraud or enforce a paramount equity, i.e., when the parent uses the subsidiary as a “mere shield” to commit fraud.  Plaintiff never contracted directly with Parent, but instead it contracted with Subsidiary 1 and Subsidiary 2.  Because Plaintiff did not allege facts to support Parent’s use of its subsidiaries to perpetuate fraud, Plaintiff failed to state any cause of action against Parent. 

(3)   The court then turned to Plaintiff’s contract claim against Subsidiary 2.  To state a claim for breach of contract under Maryland law, a plaintiff must only show (1) the existence of a contractual obligation owed by defendant to the plaintiff and (2) a material breach of that obligation by the defendant.  A plaintiff is not required to show that it complied with every procedural obligation described in the agreement.  Here, Plaintiff did not allege that it had obtained approval for additional work or that timely billed for the work, but these omissions were not fatal to the claim.  Plaintiff met its burden by alleging that (1) Subsidiary 2 was contractually obligated to pay for additional services beyond those contemplated in the 83 hour budget and (2) Subsidiary 2 failed to pay Plaintiff in breach of that obligation. 

(4)   The court dismissed Plaintiff’s claim of breach of the covenant of good faith and fair dealings, noting that Maryland does not recognize this as an independent cause of action.

(5)   Lastly, the court addressed Plaintiff’s unjust enrichment claim.  In Maryland, a claim of unjust enrichment may not be brought where the subject of the claim is covered by an express contract.  An exception to this rule occurs when there has been a breach of contract, in which case a party may obtain restitution on the theory of unjust enrichment.  If a jury finds that Plaintiff did not substantially perform under the agreement, thereby rejecting Plaintiff’s contract claim, then Plaintiff may still recover for unjust enrichment.  Both the contract and unjust enrichment claims may stand as alternative, inconsistent theories of liability.

The opinion is available in PDF.