Ohio Learning Centers, LLC v. Sylvan Learning, Inc. (Maryland U.S.D.C.)

Filed July 24, 2012

Opinion by Judge Richard D. Bennett

Held:  (1) A forfeited corporation may defend against a lawsuit and file counterclaims arising out of the same subject matter as the underlying suit.  (2) Courts employ a totality of the circumstances approach in reviewing a jury trial waiver provision, including factors such as the parties' bargaining power, the conspicuousness of the waiver provision and whether the provision is comprehensible.
 

Facts:  Plaintiffs and Defendants entered into an asset purchase agreement, a license agreement and two promissory notes pursuant to which Plaintiffs would purchase and operate a  franchise.   The license agreement also contained a non-compete clause.  Shortly thereafter, Plaintiffs were unable to make payments on the promissory notes.  Defendants sent two notices of default and intent to terminate license agreement to the Plaintiffs. 

The Court ordered Plaintiffs to "not use any or all of the trademarks, service marks, or trade names associated" with the Defendants.  The Court also held that the agreements were valid and enforceable and that Plaintiff breached those agreements.  The Court withheld ruling on any damages in order to adjudicate the remaining claims, set forth below. 
 

Analysis:  Plaintiffs argued that because two of the Defendants had forfeited their charters for failing to file personal property tax returns with the State Department of Assessments and Taxation, the defendants were prohibited from maintaining or defending any lawsuit in the state.  The Court disagreed and stated that “it is well established in Maryland that a forfeited corporation may defend against a lawsuit and file counterclaims arising out of the same subject matter as the underlying suit.”  Finch v. Hughes Aircraft Co., 57 Md. App. 190 (1984) and Price v. Upper Chesapeake Health Ventures, 192 Md. App. 695 (2010) ("an LLC whose rights have been forfeited...may only defend an action in court, not prosecute one"). 

Defendants moved to strike Plaintiffs' demand for a jury trial because the promissory notes and the asset purchase agreement contained a jury trial waiver.  The Court agreed that three of the four agreements at issue contained jury waiver clauses.  But, the Court highlighted that the main contract governing the claims in litigation did not.  The Court employed a totality of the circumstances approach.  It denied the motion after review of the superior bargaining power of the Defendants, the integrations clause in the license agreement and the inconspicuous location of the waiver clause in the promissory notes and the asset purchase agreement.   

Defendants' also moved to dismiss with respect to several fraud claims, including claims involving Maryland Franchise Registration and Disclosure Law.  The Court stated "a plaintiff can successfully bring a tort action for fraud that is based on false pre-contract promises by the defendant even if (1) the written contract contains an integration clause and even if (2) the pre-contractual promises that constitute fraud are not mentioned in the written contract."  Next Generation Group, LLC v. Sylvan Learning Ctrs, LLC, No. CCB-110986 (2012).  Because the materiality of any alleged omissions are factual questions inappropriate for determination at the motion to dismiss stage, the Court denied the motion.

The Court briefly reviewed other claims, including tortious breach of good faith, unfair competition, defamation, tortious interference in contractual relations, deceptive trade practices and antitrust conspiracy.

The full opinion is available in pdf. 

Central Truck Center, Inc. v. Central GMC, Inc. (Ct. of Special Appeals)

Filed: September 7, 2010.
Opinion by: Judge J. Frederick Sharer.

Held: This Court affirmed the trial court’s decision to grant summary judgment in favor of the Seller of a truck dealership on the basis that no fraud had been committed by the Seller and that an integration clause found in an agreement barred the Buyer from asserting claims of fraud (including fraud in the inducement), concealment, and negligent misrepresentation.

Facts:

The Seller initially sued the Buyer for breach of a written contract by failing to pay approximately $50,000. The Buyer counterclaimed for breach of contract, fraud, concealment, and negligent misrepresentation based upon Seller’s inaccurate financial statements resulting in a large part from the cancellation of a contract between the Seller and a government agency. The Buyer asserted that the proceeds of the government contract had inflated the Seller’s sales figures in the financial reports and that the Seller’s gross receipts on the financial reports were inflated due to overbilling the government agency.

The Seller sought summary judgment based, in part, on the grounds that the sale agreement contained an integration clause stating that it constituted a complete integration of the terms of the contract and superseded "all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, with respect hereto, except as contained herein." The sale agreement also did not contain any representations or stipulations to Buyer as to a continuation of Seller’s past income or the accuracy of Seller's financial statements.

The Seller also argued that: (i) the Buyer had no expectation of income from the government contract because it had expired months before the sale agreement was executed; (ii) the Seller retained (and thus did not sell) the accounts receivable after the closing; and (iii) the Buyer was aware of a pending audit of the Seller's billing practices by the government agency because the Seller had disclosed the investigation in the Exhibits to the sale agreement.

The trial court found no clear and convincing evidence that the Seller made any false representations to the Buyer, with the intent that the Buyer would rely on them, with regard to the status of the financial statements, the status of the government contract, and the allegedly overbilled contract.

The trial court determined that the Seller's financial statements were prepared and utilized in the ordinary course of business, not in anticipation of the parties' negotiations for the purchase and sale of the truck dealership. The Buyer asked to view the statements well before closing, but it did not take further action to verify or question the numbers prior to entering into the Agreement, even in light of its undisputed knowledge that an audit of the allegedly overbilled contract was in the offing. Especially given the integration clause, the fact that the financial statements were not incorporated into the agreement, and that the parties were sophisticated in business matters and represented by counsel, there was no evidence that Buyer reasonably relied on the figures in the Seller’s financial statements.

The Buyer appealed the lower court’s decision to grant summary judgment on the grounds that the lower court erred by employing the incorrect standard in evaluating the claims and wrongly concluded there was no dispute of material facts and improperly relied on the sale agreement’s integration clause to foreclose any argument on fraud, concealment and any of the tort claims such as negligent misrepresentation.

The Seller argued against the appeal on the grounds that the lower court: (i) properly applied the integration clause to bar the court from considering any document outside of the four corners of the agreement; (ii) correctly ruled that the record did not support a finding that the Seller made any false representations, and (iii) the lower court found proper notice of the status of the government contract and thus any reliance by the Buyer on a different status was improper.

Analysis:

This Court affirmed the lower court’s decision to grant summary judgment in favor of the Seller because the Buyer did not show that the Seller made any false representations that it justifiably relied upon or that it suffered compensable injury from such representations.

The Court evaluated the matter based on the elements for fraud under Maryland law, which are: (1) the defendant made a false representation to the plaintiff, (2) that its falsity was either known to the defendant or that the representation was made with reckless indifference to the truth, (3) that the misrepresentation was made for the purpose of defrauding the plaintiff, (4) that the plaintiff relied on the misrepresentation and had the right to rely on it, and (5) that the plaintiff suffered compensable injury resulting from the misrepresentation.

The Court found that the government contract, books and records were found to be in existence long before the sale agreement was even contemplated, and that the exhibits to the sale agreement provided notice to the Buyer of the pending audit by the government agency, and that the Seller made no representation to the Buyer that it could expect the same level of income in the summer months following the closing of the transaction.

The Court also found that the Buyer’s reliance on any statements by the Seller was improper because the Seller’s financial statements were prepared by the Seller and used by the Seller in its ordinary course of business and were provided to Buyer well before closing and the Buyer made no further investigation of the financial statements even though it had notice of a pending audit. It also found that the parties were represented by sophisticated service providers and could not understand how the Buyer could conclude that financial statements reporting the past could guarantee future performance.

The Court also found that the integration clause combined with the sophistication of the parties made the reliance by the Buyer of documents not part of the sale agreement (the financial statements were not included in the agreement) unreasonable.

The Court, even after assuming for argument purposes that the Seller misrepresented the sales figures and the Buyer justifiably relied on the misrepresentation, held that the Buyer did not present any clear and convincing evidence of any compensable injury as a result of such acts. Buyer's evidence of damages consisted of the speculative and unsupported assertion that it paid more for Seller’s dealership than the dealership was worth. The mere fact that Buyer's sales in the first three months of operating the dealership were lower than anticipated, based on the allegedly inflated revenues in Seller's financial statements, does not by itself establish that the Buyer's losses were caused by any unfulfilled promise by the Seller. Even if the allegedly overbilled contract had improperly inflated the Seller’s revenues, the Buyer had no expectation of any revenue from that contract, which expired prior to the negotiations for purchasing the dealership. Furthermore, the Seller had retained all rights to collect its account receivables.

The Court affirmed that lower court’s summary judgment in favor of the Seller because there was no evidence of any misrepresentation or concealment by the Seller.

The full opinion is available in PDF.