John Poling v. Caplease, Inc. (Cir. Ct. Balto. City)

Filed: May 13, 2015

Opinion by: Judge W. Michel Pierson

Holdings: (1) The conversion of preferred stock to cash in connection with a cash-out merger does not violate the redemption provisions of the preferred stock, when the transaction at issue does not constitute a redemption. (2) The conversion of preferred stock to cash in connection with a cash-out merger does not violate the provisions of the preferred stock that establish a limitation upon the right of preferred stockholders to convert their stock.

Facts: Plaintiff was a holder of preferred shares in defendant corporation.  Defendant's charter authorized the corporation to issue shares of Series B Preferred Stock and Series C Preferred Stock. The Articles Supplementary classifying the preferred stock included the following terms:

[Section 3 provides for the payment of cumulative dividends at the yearly rate of 8.375% of the $25.00 per share liquidation preference of the Series B Preferred Stock (equivalent to a fixed annual amount of $2.09375 per share). The Series C Articles Supplementary contains similar terms, with an interest rate of 7.25% (equivalent to a fixed annual amount of $1.8125 per share). The Charter further provides that the Series B Preferred Stock is not redeemable prior to April 19, 2017, while the Series C Preferred Stock is not redeemable prior to January 25, 2018.]

On May 28, 2013, defendant entered into a Merger Agreement with an acquirer. According to the agreement, the acquirer would pay an amount in cash equal to $8.50 per share for each outstanding share of defendant's common stock, and each share of preferred stock would be converted into the right to receive the sum of $25.00 in cash plus an amount equal to any accrued and unpaid dividends up to but excluding the closing date of the merger.

Plaintiff felt aggrieved because holders of the preferred stock would lose their right to receive future dividends after the merger. On October 8, 2013, Plaintiff sued the defendant and alleged that the merger was a breach of the company’s contract with its preferred stockholders and that the directors had violated fiduciary duties.

Analysis: The complaint of plaintiff contained four counts, each denied by the court.

For Count I, plaintiff asserted a breach of contract claim alleging the transaction violated the redemption provisions of the Articles Supplementary. The court discussed the following: (1) While section 6 of the Articles Supplementary does limit defendant’s right to redeem the preferred stock, which would restrict the conversion of the preferred stocks, the transaction at issue did not constitute a redemption, because defendant did not acquire the stock. In addition, the Maryland General Corporation Law ("MGCL") authorizes a Maryland corporation to merge into another entity. The MGCL provides that in such a merger stock may be converted into money. See MGCL Section 3-103. (2) Contrary to plaintiff’s contention, Section 9 of the Articles Supplementary does not prevent the conversion of the preferred shares to cash upon a merger. The court interpreted this provision of the Articles Supplementary to establish a limitation upon the right of preferred stockholders to convert their stock, distinguishing the preferred stock at issue from convertible preferred securities. (3) The court declined to speculate about the possible ramification of Section 7(b) of the Articles Supplementary, related to voting rights, which had not been expressly argued.

For Count II, the court held that the plaintiff had failed to state a claim based on the defendant’s breach of fiduciary duty. The breach of fiduciary duty claim largely relied upon the allegations that defendants’ conduct contravened the Articles Supplementary. However, the court already rejected plaintiff’s contention that the merger violated the Articles Supplementary.

The court briefly discussed plaintiff’s claims for declaratory relief and aiding and abetting for Count III and Count IV, before granting defendant’s motion to dismiss.

The full opinion is available in PDF. 

A Guy Named Moe, LLC v. Chipotle Mexican Grill of Colorado, LLC (Ct. of Special Appeals)

Filed:  May 29, 2015

Opinion by Krauser, C. J.

Holding:  A foreign limited liability company that had its right to do business in Maryland forfeited, but nonetheless continued to do business in Maryland, cannot maintain a suit in Maryland and the filing of a petition for judicial review filed during that time of forfeiture is void ab initio.

Facts:  A foreign limited liability company filed a petition requesting the circuit court review a decision of the City of Annapolis Board of Appeals.  The petition was filed within the 30-day period for filing a petition under Rule 7-203(a); however, the petition was filed several years after the company’s right to do business in Maryland had been forfeited.  An affidavit of a business manager of the company asserted that articles of revival and the accompanying payment were submitted prior to the filing of the petition.  The manager also asserted that four months after filing the petition with the circuit court, the company learned that the articles of revival were rejected.  The company subsequently obtained a certificate of good standing.

The circuit court dismissed the action citing lack of standing under Section 4-401(a) of the Land Use Article.  The court affirmed on different grounds.

Analysis:  The court agreed that the Maryland LLC Act allows a foreign limited liability company to “cure the infirmity” of forfeiture to maintain suit.  Yet, the court disagreed that securing the right to maintain suit permitted the company to rely on a petition it filed when it had no right to do so.  While no direct precedent was available, the court noted precedent recognizing that the forfeiture to do business in Maryland does not prevent a limited liability company from defending any action.  The court also noted that Section 4A-1009(a) of the Maryland LLC Act “expressly bars a foreign limited liability company from maintaining suit when it is doing business in Maryland with no right to do so.”

The court then reviewed corporate cases involving charter forfeitures, which support the notion that a limited liability company may not revive a suit, though timely filed, when the suit was initiated by an entity after the entity had lost the right to do business in Maryland and yet persisted in doing business in Maryland.

The full opinion is available in PDF.

White v. Green Tree Servicing, LLC (Maryland U.S.D.C.)

Filed:  August 4, 2015

Opinion by:  Richard D. Bennett

Holdings:  (1) Fair Credit Reporting Act (''FCRA'') claims alleging provision of false information and failure to investigate such information were dismissed to the extent plaintiff premised her claim on a theory of negligence.  (2) Plaintiff satisfied 12(b)(6) sufficiency standard by merely alleging she notified consumer reporting agency of disputed information.

Facts:  In 2001, Plaintiff acquired property in Baltimore City with her former husband, becoming sole owner after a 2007 divorce.  Five years later, servicing rights for the loan were transferred to Defendant.  Following the June 1, 2013 date of transfer Plaintiff alleged she made every ensuing payment in full and on time.

In October 2013, Plaintiff attempted to refinance the loan through her personal bank, receiving approval and a commitment letter conditioned on Plaintiff resolving unrelated disputes on her credit report.  Plaintiff fulfilled the conditions in January 2014, but Defendant soon thereafter reported to Plaintiff, Plaintiff’s personal bank, and the three major credit reporting agencies that she was no longer current on her mortgage payments.  Pursuant to the FCRA, 15 U.S.C. §1681, et seq., on January 27, 2014, Plaintiff notified the reporting agencies and Defendant that she disputed Defendant’s reporting of late mortgage payments.  One day later, Plaintiff’s bank denied her for final approval of the refinanced mortgage.

Defendant responded in February 2014, maintaining its position that Plaintiff was behind on her payments.  Defendant thereafter issued several letters indicating it would investigate disputed payment information, but ultimately sent another statement in March 2014 informing Plaintiff she had fallen farther behind on her mortgage, incurring additional late fees.

In June 2014, Plaintiff filed in Circuit Court for Baltimore City, alleging violations of the Maryland Consumer Protection Act (''MCPA''), Debt Collection Act, (''MCDCA''), and Mortgage Fraud Protection Act, (''MMFPA''), contending Defendant failed to investigate or correct the payment information and that she suffered economic damages.  Defendant moved to dismiss, arguing the complaint was preempted by the FCRA.  Plaintiff thereafter amended her complaint to allege identical state claims but add FCRA claims.  Defendant again moved to dismiss the common law claims as preempted by the FCRA, and to dismiss the FCRA claim because Plaintiff had failed to state a claim on which relief could be granted.

Analysis:  The court began by explaining that the FCRA’s preemption provisions –  15 U.S.C. §1681t(b)(1)(F) as to state statutory claims and 15 U.S.C. §1681h(e) as to state common law claims – had been consistently interpreted to preempt claims arising from inaccurate information provided to credit reporting agencies.  Accordingly, the court dismissed Plaintiff’s counts alleging violations of the MCPA, MCDCA and MMFPA as a result of Defendant’s purported materially false, misleading oral or written statements, omissions, or representations related to the Plaintiff’s loan status or mortgage lending process.

The court next moved to Plaintiff’s FCRA claims, which focused on Defendant’s provision of allegedly false information and failure to investigate the allegedly false information.  To the former, Plaintiff alleged Defendant’s liability in defamation for making a series of false and misleading statements as to the late mortgage payments.  Here, the court cited §1681h(e):

[No] consumer may bring any action …in the nature of defamation… with respect to the reporting of information against …any person who furnishes information to a consumer reporting agency, … based on information disclosed by a user of a consumer report to or for a consumer against whom the user has taken adverse action, based in whole or in part on the report except as to false information furnished with malice or willful intent to injure such consumer.

Accordingly, the court granted Defendant’s motion to dismiss the defamation claim in part and only to the extent the claim was premised on a theory of negligence.

Plaintiff’s second FCRA claim alleged that Defendant violated §1681s-2(b) by a failure to investigate allegedly false information for several months after it was informed of the disputed information.  FCRA §1681s-2(b) imposed a duty to investigate disputed information after receiving notice [from a credit reporting agency].  Defendant moved to dismiss, arguing Plaintiff failed to explicitly allege that Defendant received such notice.  Finding no controlling Fourth Circuit authority, the court looked to decisions of the U.S. Courts of Appeal for the Seventh and Ninth Circuits, indicating that under the FCRA a plaintiff triggered a defendant-furnisher’s duty to investigate by merely notifying the consumer reporting agency of a dispute.  In the court’s view, all that was required to meet the Rule 12(b)(6) pleading sufficiency standard was plaintiff’s allegation that she notified the reporting agency of disputed credit information.  As a result, Plaintiff’s second FCRA claim survived Defendant’s motion to dismiss.

The full opinion is available in PDF.

Hogans v. Hogans Agency, Inc. (Ct. of Special Appeals)

Filed:  August 28, 2015

Holding: A corporation may require a stockholder, who is a direct competitor of the corporation, to sign a confidentiality agreement before inspection of the corporation’s books of accounts and other corporate records.

Facts:  Stockholder (the “Stockholder”) owns 37.5% of stock in an insurance and real estate brokerage company (the “Corporation”).  Stockholder also owns another real estate brokerage company that is a competitor to the Corporation.  The Stockholder asserted that his right to request an inspection of company records falls under Sections 2-512 and 2-513 of the Maryland General Corporation Law (the “MGCL”). Section 2-513 broadens the rights for stockholder's who have had at least 5% of the outstanding stock of a corporation, for at least six months. A stockholder who fits the criteria has the right to inspect the "book of accounts" of the corporation. 

The Corporation responded to the request by providing the Stockholder with copies of the Corporation’s bylaws, minutes of the proceedings of the Corporation’s stockholders, an annual statement of affairs for the prior tax year and the name, address, and shares of each of the Corporation’s stockholders. The Corporation agreed to allow for the onsite inspection and copying of the books of accounts, under the condition that the Stockholder sign a confidentiality agreement, prohibiting the Stockholder from sharing the information with a third party. The Stockholder refused and filed a pro se Complaint for Stockholder’s Right to Inspect requesting: 1) to gain immediate access to a copy of the books of account for inspection; 2) access to the Corporation’s photocopier free of charge; 3) the Corporation to pay for a complete audit of company records and 4) the Corporation to pay the Stockholder’s attorney’s fees and costs.

The trial court granted the Corporation’s motion for summary judgment ordering that a confidentiality agreement must be signed by the Stockholder in order for him to be allowed access to inspect corporate records. 

Analysis:  On appeal, the Stockholder argued the MGCL does not require that a stockholder sign a confidentiality agreement prior to inspection of a corporation’s records and that “possible competition” between a stockholder and a corporation is not sufficient to deny a stockholder his right of inspection.  The Court noted that the right of a stockholder to inspect the corporate records of a corporation is provided for under Sections 2-512 and 2-513 of the MGCL, which delineates the differences between the rights of any stockholder versus that of a stockholder who has owned more than 5% for six months.

The Court pointed to two case holdings regarding stockholder access to corporate records, that were reconciled through a treatise authored by James J. Hanks Jr.  In Weihmayer vs Bitner, 88 Md. 325 (1898), it was determined that a stockholder was entitled to an absolute right to inspect corporate records, that can be refused only through a finding that the intended use was “evil, improper of unlawful.”  In Wright v. Hebin, 111 Md. 644 (1910) the court decided it would allow for the refusal of access, if the court issued a writ of mandamus, where it decided what the proper safeguards to protect the interests of all concerned would be. Stockholders could gain access to information for “legitimate purposes.” 

Hanks agreed that a five-percent, six-month stockholder was entitled to inspect the books, for the purpose of protecting his equity investment, “but not for any other purpose, such as competing with the corporation.”  Hanks goes on to state that a corporation may take reasonable measures, such as conditioning the right to inspect corporate records upon the stockholder signing a confidentiality agreement, “to protect the corporation against disclosure and misuse of confidential documents and information.”

The Court relied upon this explanation of the rights of a stockholder to inspect, and agreed with the trial court’s “exercise of sound discretion” in requiring the Stockholder to sign a confidentiality agreement prohibiting him from sharing information with third parties.  The condition of allowing access, after a confidentiality agreement was signed, was found to be a reasonable means to prevent the Stockholder from using the inspection rights to gain information that could be used to advance his own competing business.

The full opinion is available in PDF.

Federal Insurance Co. v. Mathews Brothers, LLC, and Alban Tractor Co., Inc. (Maryland U.S.D.C.)

Filed: August 14, 2015

Opinion by: Richard D. Bennett

Holdings:

(1) The Maryland Uniform Commercial Code (UCC) applies to the manufacture of a yacht because the predominant purpose is the provision of a good with labor incidental thereto.

(2) The UCC applies to the manufacture and installation of a yacht engine and related parts because the predominant purpose is the provision of a good with labor incidental thereto.

Facts:

Original Owner contracted with Builder to manufacture a yacht (Yacht Contract).  Builder then contracted with Engine Company to install an engine on the yacht (Engine Contract).  Engine Company provided an engine to Builder, who physically placed it on the yacht.  Before delivery to Original Owner, Engine Company performed final “hook ups” and accessory installations, conducted a “PAR Test” and replaced the engine.  Then, Builder delivered the completed yacht to Original Owner.  Original Owner died and his estate sold the yacht to Second Owner, who procured insurance from Insurance Company.  Subsequently, the yacht sunk and Insurance Company paid Second Owner on the insurance contract.  Then, Insurance Company sued Builder and Engine Company.

Analysis:

The Court determined the Yacht and Engine Contracts were mixed contracts because they involved both goods and services.  The Court accordingly applied the predominant purpose test to determine whether these mixed contracts are controlled by the UCC.  The UCC applies to transactions in goods, which are “movable at the time of identification to the contract for sale.”  The predominant purpose test asks “whether (the contract’s) predominant factor, (its) thrust, (its) purpose, reasonably stated, is the rendition of service, with goods incidentally involved (e.g., contract with artist for painting) or is a transaction of sale, labor incidentally involved (e.g., installation of a water heater in a bathroom).”

The Court cursorily concluded the Yacht and Engine Contracts were contracts for the sales of goods, with labor incidentally performed.  Therefore, the UCC and its four-year statute of limitations applied and the default three-year statute of limitations in the Courts and Judicial Proceedings Code did not apply.  The UCC’s statute of limitations ran from the date of tender of delivery to the Original Owner, which expired over 18 months before the filing of the action, thus Insurance Company’s claims were barred.  Builder’s and Engine Company’s Motions to Dismiss were Granted pursuant to FRCP 12(b)(6).

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.