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

Filed: May 10, 2017

Opinion by: Judge Barbara Milano Keenan

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

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

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

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

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

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

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

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

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

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

The full opinion is available in PDF. 

Egan v. First Opportunity Fund Inc. (Cir. Ct. Balto. City)

Filed: April 22, 2016

Opinion by: Judge W. Michel Pierson

Holding: Stockholders of a Maryland corporation were not entitled to payment of fair value for their shares of stock (commonly referred to as “appraisal” rights) under the Maryland General Corporation Law (the “MGCL”), § 3-202, where the corporation’s charter was amended to expressly divest the stockholders of any appraisal rights in connection with a subsequent consolidation of the fund into another fund because (i) appraisal rights are not “contract rights” nor were they “expressly set forth” in the corporation’s charter as required under MGCL § 3-202(a)(4), and (ii) the amendment of the charter to divest the stockholder appraisal rights occurred prior to the consolidation and thus, at the time of the vote on the consolidation, the charter had eliminated appraisal rights in accordance with MGCL § 3-202(c)(4).

Facts: First Opportunity Fund, Inc., was a registered closed-end investment fund formed as a Maryland corporation (“FOFI”).  In 2014, the stockholders of FOFI and the stockholders of two other funds managed by affiliated directors and fund advisors were asked to approve a plan of reorganization (the “Consolidation”), under which the assets of those three funds would be transferred to Boulder Growth and Income Fund, Inc. (“BIF”).  Of all the funds involved in the Consolidation, FOFI was the only corporation whose stockholders enjoyed Maryland’s statutory appraisal rights under MGCL § 3-202 (because the other funds were publicly traded and thus excepted from the appraisal rights requirement pursuant to MGCL § 3-202(c)(1)).  Therefore, prior to submitting the proposed Consolidation to the stockholders for their consideration, the board of directors of FOFI proposed that the charter of FOFI be amended to divest FOFI’s stockholders of any appraisal rights (“Proposal 1”).

The proxy statement issued by the directors of the four funds disclosed that if Proposal 1 was approved, the stockholders meeting would be temporarily adjourned and FOFI would file articles of amendment to amend the charter to include Proposal 1.  If Proposal 1 was not approved, the proposal to consider the Consolidation would not be considered.

At the FOFI stockholders meeting, Proposal 1 was approved.  The meeting then adjourned and articles of amendment containing Proposal 1 were accepted for record by the State Department of Assessments and Taxation.  The meeting then resumed and the transfer of assets from FOFI to BIF was approved by the FOFI stockholders.  Following these actions, two of FOFI’s stockholders (the “Plaintiffs”) submitted a written demand for the fair value of their shares and otherwise complied with the statutory requirements for perfecting appraisal rights under the MGCL.  FOFI and BIF denied the demand and the Plaintiffs filed suit, seeking fair value of their stock pursuant to MGCL § 3-202.  The defendants moved to dismiss the action, and, for the reasons detailed below, the Court granted the defendants’ motion and dismissed the Plaintiffs’ claims.

Analysis: MGCL § 3-202 provides that stockholders of a Maryland corporation may demand and receive payment of fair value of their stock in the event of certain fundamental corporate changes.  The statute also provides a number of circumstances where a dissenting stockholder has no such appraisal right.  See MGCL § 3-202(c).  In Egan, the Plaintiffs alleged that two fundamental changes occurred in connection with the Consolidation process, thus triggering their appraisal rights under the MGCL.  First, in Count I of the Plaintiffs’ complaint, based on the Consolidation of FOFI into BIF, the Plaintiffs asserted appraisal rights arising under MGCL § 3-202(a)(1), which provides for appraisal rights in the event a “corporation consolidates or merges with another corporation.”  Second, in Count II of their complaint, the Plaintiffs asserted appraisal rights arising under MGCL § 3-202(a)(4), which provides for appraisal rights if a “corporation amends its charter in a way which alters the contract rights, as expressly set forth in the charter, of any outstanding stock and substantially adversely affects the stockholder's rights, unless the right to do so is reserved by the charter of the corporation.” 

As to Count I, the Court found that, although there was “no dispute” that the Consolidation of FOFI into BIF was a consolidation or merger under MGCL § 3-202(a)(1), the Plaintiffs’ claims were subject to the provisos of MGCL § 3-202(c).  Among other things, that subsection provides that “a stockholder may not demand the fair value of the stockholder’s stock and is bound by the terms of the transaction if: … [t]he charter provides that the holders of the stock are not entitled to exercise the rights of an objecting stockholder under this subtitle.”  MGCL § 3-202(c)(4).  The Court found that the amendment to FOFI’s charter was adopted in accordance with the literal requirements of the MGCL and, consequently, pursuant to MGCL § 3-202(c)(4), the Plaintiffs had no appraisal rights by virtue of the Consolidation.  In reaching this conclusion, the Court rejected the Plaintiffs’ arguments that the adoption of Proposal 1 and the consolidation were really one and the same transaction and that the amendment of FOFI’s charter should therefore be ignored for purposes of determining the Plaintiffs’ appraisal rights.  Rather, the Court held that the independent nature of the adoption of Proposal 1 and the approval of the Consolidation could not be ignored by the Court in search of a higher equity under the guise of a substance over form analysis.

As to Count II, the Court found that the Plaintiffs had no appraisal rights as a result of the amendment of FOFI’s charter because, after reviewing the legislative history of MGCL § 3-202(a)(4), the Court concluded that appraisal rights are not “contract rights” as used in the statute but that the statute instead refers to “contractual attributes of the stock itself, and does not mean every contract right included in the corporate charter.”  The Court also found that, even if appraisal rights were contract rights, FOFI’s charter made no mention of such rights and thus they were not “expressly set forth” in FOFI’s charter prior as required under MGCL § 3-202(a)(4).  In reaching this conclusion, the Court rejected the Plaintiffs’ assertion that appraisal rights should be deemed to be expressly set forth in FOFI’s charter because a corporation’s charter is a contract between the corporation and its shareholders and statutory law is incorporated into a contract under Maryland law.  On this issue, the Court concluded that “treating an object ‘as though’ it is expressly set forth is not equivalent to that object actually being expressly set forth.”

The full opinion is available in PDF.

Dexter v. ZAIS Financial Corp. (Cir. Ct. Balto. City)

Filed: December 8, 2016

Opinion by: Judge Audrey J.S. Carrion

Holding:

The Wittman standard of awarding attorneys’ fees is not met in a cash-stock merger suit alleging inadequate information in the registration statement because (1) directors do not owe shareholders a common law duty of candor in that type of transaction, and therefore the claim cannot be “meritorious” when filed, and (2) the corporate benefit was not casually related to the suit when the information in published disclosures was in accordance with previous public filings filed before the suit.

Facts:

On April 7, 2016, a merger agreement was announced between ZAIS, the Defendant, and another party, the Second Defendant, in which shareholders could elect to receive all cash or all stock.  The Second Defendant would be merged into a subsidiary of Defendant, ZAIS would issue its shares to the Second Defendant’s shareholders, and ZAIS would make a pre-merger tender offer to its shareholders who would not like to own shares in the resulting company.

The registration statement was filed on May 10 and amended on June 20 and August 5, 19 and 26, 2016 (the “August Registration Statement”).   On August 24, 2016, Dexter, the Plaintiff, an individual shareholder of Defendant, filed a complaint alleging inadequate information about the shareholder vote.  Plaintiff argued that details about the final exchange ratio, the per share tender offer price and conflicts of interest were missing from the registration statement.

Dexter then filed a Motion for Preliminary Injunction.  On September 12, 2016, ZAIS filed supplemental disclosures with the SEC.  On September 19, 2016, Dexter withdrew the Injunction Motion as moot and it was granted.  On September 30, 2016, Dexter filed a request for attorneys’ fees.  Defendants argue that the supplemental disclosures were disclosed not due to Plaintiff’s demand letter, but rather in accordance with the registration statement.

Analysis:

The “corporate benefit” doctrine is an exception to the American Rule, which states that litigants bear the cost of their own attorneys’ fees and expenses.  In re First Interstate Bancorp, 756 A.2d 357, 756 A.2d 353, 357 (Del. Ch. 1999).  It should be noted that attorneys’ fees can be awarded even when a defendant moots a claim by satisfying a plaintiff’s demands.  Tandycrafts v. Initio Partners, 562 A.2d 1162, 1164 (Del. 1966) citing Chrysler Corp. v. Dann, 223 A.2 384, 386 (Del. 1966).

The Court required the Plaintiff to satisfy the three conditions of the Wittman standard: the suit was meritorious when filed; the action producing the corporate benefit was taken by the Defendant prior to a judicial resolution; and the resulting corporate benefit was causally related to the lawsuit.  Wittman v. Crooke, 120 Md. app. 369, 379, 707 A.2d 422, 426 (1998).

1. The Suit was not meritorious when filed.

A suit is “meritorious” when it can “withstand a motion to dismiss on the pleadings.”  The Court held that Plaintiff’s claim that the Defendant’s directors breached the duty of candor and the Second Defendants aided and abetted that breach could not have been meritorious.

The Court disagreed with Plaintiff that Shenker applied to this case.  The transaction in Shenker v. Laureate Education, Inc., 411 Md. 317, 338, 983 A.2d 408, 420 (2009), involved a cash-out merger after the decision to sell the corporation had already been made and that Court “determined the common law duties are triggered when the decision is made to sell the corporation, the sale of the corporation is a foregone conclusion, or the sale involved an inevitable or highly likely change-of-control situation.”

In this case, the Court agreed with Defendant that Revlon duties do not apply in a cash-stock election merger, similar to this merger.  Therefore, individual shareholders like the Plaintiff may not bring direct claims against the directors for a breach of common law duties.  ZAIS also referred to Sutton v. FedFirst Financial Corp., 226 Md. App. 46, 85, 126 A.3d 765, 788 (2015), which involved a stock-for-stock transaction, and the Court of Special Appeals did not apply Revlon.

2. The corporate benefit was not causally related to the Suit.

The September 12 Supplemental Disclosures were made in accordance with the August Registration Statement, which included a prospectus with a calculation of the exchange ratio, that was to be publicly announced at least five days before the shareholder meetings.

The Court found that the benefit to the Defendant’s shareholders – the disclosure of the Exchange Ratio and Tender Offer price – was not caused by the Plaintiff’s lawsuit; it was “mere happenstance” (Wittman).

The full opinion is available in PDF.

Murray v. Midland Funding, LLC (Ct. Spec. Appeals)

Filed: April 26, 2017

Opinion By: Friedman

Holding: The applicable statute of limitations limits the timeliness of legal claims, and the doctrine of laches limits the timeliness of equitable claims, but either or both sets of principles may limit the timeliness of declaratory relief from a court.

Facts: The Plaintiff had been sued by the Defendant on a debt, resulting in a judgment in favor of the Defendant.  Subsequently, in 2010, the Maryland State Collection Agency Licensing Board held that companies like Defendant are debt collectors and must be licensed to operate in Maryland.  The Court of Appeals held in Finch v. LVNV Funding, 212 Md. App. 748 (2013), that judgments obtained by such unlicensed debt collectors are void.  The Plaintiff brought a purported class action on behalf of herself and other debtors seeking various relief against Defendant for judgments obtained by the Defendant while it was unlicensed.

Analysis: The Court discussed the rules that bar stale claims.  For legal claims, the time limitations are determined by the applicable statute of limitations.  Under Maryland law, Courts & Judicial Proceedings Article § 5-101 may apply the three year limitation period for monetary claims against debt collectors that attempt to enforce void judgments against a debtor.  However, the Court held that this was not a bar to Plaintiff's equitable claims advanced and dismissed by the trial court.

For equitable relief, such as injunctive relief, the doctrine of laches determines whether a plaintiff's claim is time barred.  "There is no firm time limit for laches: rather a judge sitting in equity considers plaintiff's delay in asserting the claim and its causes and weighs that against the prejudice to the defendant caused by the late assertion of the equitable claim."  As to the Plaintiff's count for injunctive relief against the Defendant, the Court held that the trial court's dismissal of this count had to be reversed, and the above laches doctrine would need to be applied to her demand.

However, declaratory judgments sit in a hybrid category when analyzing whether such a claim is time-barred.  The Court notes that when a plaintiff merely seeks a court declaration that a judgment obtained by an unlicensed debt collector is void, there is no time limit on when such an action may be filed.  But, when the declaratory judgment count includes other relief, the applicable time limit on each of those claims must be calculated based on whether the relief is legal or equitable in nature.  As a result, the Court reversed the trial court's dismissal of her declaratory judgment claim so that the trial court could determine what relief, if any, was sought by the Plaintiff ancillary to a declaration that Defendant's judgment was void.

The full opinion is available in PDF.

Frank R. Nerenhausen v. Washco Management Corp. (U.S.D.C.)

Filed: April 18, 2017

Opinion by: James K. Bredar, United States District Judge

  

Holding:

            The United States District Court for the District of Maryland granted landlord Defendants, Washco Management Corp., summary judgment when tenant Plaintiffs attempted to collect damages for an injury occurring in the leased premises after Plaintiff entered into a lease agreement waiving Plaintiff’s rights to all legal claims resulting from Defendants’ negligence.

Facts:

            In April of 2013, Plaintiffs moved into a furnished townhouse, owned and managed by Defendants. On September 4, 2013, Plaintiffs signed a lease with Defendants, which was in force at the time of the critical events of this case. That lease contained an exculpatory clause purporting to disclaim Defendants’ liability for “any damage, loss, or injury to persons occurring in, on, or about the apartment or the Premises.”

           

            In compliance with the terms of the parties’ agreement, Plaintiffs’ townhouse was fully furnished. The furnishings included a coffee table with a metal frame and a top constructed from non-tempered glass. The table was located in the townhouse’s first floor family room.

           

            On January 4, 2014, as Plaintiff Frank Nerenhausen sat on the edge of the coffee table to tie his shoe, the glass top shattered. Broken glass punctured Mr. Nerenhausen’s right buttock, lacerating his pudendal artery and resulting in nerve damage.

Analysis:

(1)  Validity of the Exculpatory Clause under Maryland law

Relying on relevant case law and long-standing Maryland statute, the Court finds the well-established freedom to contract validates this lease agreement’s exculpatory clause.

The Court identifies two circumstances under which this exculpatory clause would have been invalid: (a) if the language of the clause was ambiguous; or (b) if the clause waived Plaintiffs’ claims with respect to liability for occurrences “on or about the leased premises or any elevators, stairways, hallways, or other appurtenances used in connection with them.” On the contrary, the Court suggests that exculpatory clauses waiving liability occurring within premises that are “within the exclusive control of the tenant” shall remain valid.

Because the language of the exculpatory clause at issue is unambiguous, and the injury suffered by Plaintiff was within an area exclusively controlled by the tenant Plaintiffs, the Court finds no reason to invalidate the lease agreement’s exculpatory clause.

The Court further articulates the meaning of what constitutes “exclusive control of the tenant,” pointing to Shell Oil Co, which states a landlord’s mere ability to enter the premises fails to render the premises not under exclusive control of the tenant. In other words, even though a landlord may enter the premises, barring other circumstances, the tenant still maintains exclusive control of the premises. Similarly, here, the landlord Defendants’ ability to enter the premises for a “reasonable business purpose” did not give reason to find Plaintiff was not in exclusive control of the premises.

Plaintiffs further allege they had no control over the selection and purchase of the table that gave rise to the injury, suggesting Plaintiffs did not have exclusive control over the premises. However, the Court notes that Plaintiffs cite no relevant law supporting this position. Consequently, Plaintiffs’ theory is dismissed.

(2)  Effect of Exculpatory Clause on Plaintiff’s Negligence Claim

The Court finds the exculpatory clause at issue successfully waived Plaintiffs’ negligence claim, as the language of the clause clearly and unequivocally indicates Plaintiff and Defendants’ intent to do so.

In Maryland, “contracts will not be construed to indemnify a person against his own negligence unless an intention to do so is expressed in those very words or in other unequivocal terms.” (Aldoo v. H.T. Brown Real Estate, Inc., 686 A.2d 298, 302 (Md. 1996)). Furthermore, an enforceable exculpatory clause need not use the word “negligence” or any particular “magic words,” but must “clearly and specifically indicate the intent to release the defendant from liability for personal injury caused by the defendant’s negligence. (Id. at 304).

In the case at bar, although the exculpatory clause does not use the word “negligence,” Plaintiff nonetheless agreed to absolve Defendants from liability for any injury “occurring in, on or about the apartment of the premises.” Furthermore, Plaintiff agreed to absolve Defendants from “any liability or claim to the fullest extent permitted by law.” The Court concludes the only reasonable interpretation of this clause is that the parties intended to exculpate Defendants from all claims to the extent permitted by applicable law, which would include exculpation from claims of negligence. Accordingly, the Court finds the exculpatory clause effectively and unequivocally disclaims Defendants’ liability for their potentially negligent action with respect to the glass table that was instrumental in Mr. Nerenhausen’s injury.

The opinion is available in PDF.  

Under Armour, Inc. v. Ziger/Snead, LLP (Ct. of Special Appeals)

Filed:  April 27, 2017

Opinion by:  Alan M. Wilner

Holding:  An award of losses in the amount of the value of time spent by principals and employees in performing litigation-related activities was proper, given an expense-shifting provision negotiated separately by sophisticated parties calling expressly for reimbursement in the event of losses.

Facts:  Appellant Under Armour, Inc. (“Owner”) engaged Appellee Ziger/Snead, LLP (“Architect”) to provide design and management services related to a construction project.  After a contract dispute arose, Owner withheld approximately $55,000.  In the Circuit Court for Baltimore City, Architect sued for the sum plus accrued fees while Owner counterclaimed for losses and damages suffered as a result of allegedly substandard work and inadequate management.

After the jury found in favor of Architect and awarded nearly $60,000, Architect filed a motion pursuant to the contract’s expense-shifting clause seeking nearly $300,000 in attorney fees, costs, expenses, and losses.  The court generally agreed and entered final judgment in the amounts of $182,735, $155, $42,830, and $62,190 respectively.  Owner paid all but the $62,190 awarded for losses and appealed the basis for such an award.

With respect to the losses claim, evidence presented below consisted of time tracking records and hourly rates charged by Architect’s employees in performing the kind of work the firm was engaged to perform.  Architect therefore sought not “lost profits” on new business but the value of the time its principals and employees were not able to devote to the pursuit of providing professional services to its other active clients.

Owner did not contest Architect’s accounting, but generally appealed that the court should not have awarded anything for “losses,” arguing (1) that the expense-shifting clause was not sufficiently specific to permit a claim for time spent by principals and employees performing litigation-related tasks, and (2) in any event the hourly rates were an inappropriate measure because Architect’s employees would have been paid regardless of whether they had been engaged in litigation-related activities or their usual work.

Analysis:  The court began by dispensing with Architect’s initial position that the appeal concerned whether it had actually suffered losses, a question of fact which would necessitate a “clearly erroneous” standard of review.  Instead finding that the principal matter was one of contract construction and thus a question of law – whether the losses suffered were compensable under the contract’s expense-shifting provision – the court continued with its de novo review.

Focusing next on the contract itself, the court noted that the expense-shifting provision had been separately negotiated along with other provisions as an addendum to a standard form contract drafted by the American Institute of Architects.  The provision was not a mere general contract damages breach clause, but came into play only where the prevailing party had “[employed] counsel or an agency to enforce [the] Agreement,” and expressly provided for reimbursement of attorney’s fees, costs, expenses, and losses.  Although the contract failed to define losses, the court deemed the absence of such a definition within a document negotiated by sophisticated organizations not to be fatal.  Instead the court looked to intent and determined the lack of specificity to be precisely the point: avoiding the need to spell out each and every kind of loss that might accrue from breach.

So: did losses include diverted employee time to tasks that litigants typically undertake without compensation?  Finding support from a sundry list of cases decided in various states and Circuits, the court was persuaded that the issue was not whether employees would have in any event been compensated for their time, or whether the complaining party had incurred additional expenses or lost profits, but whether a breach had deprived the complaining party of services it had compensated its employees for providing.

Examining the record, the court noted unchallenged evidence of more than 300 hours spent in activities such as investigating facts, conducting discovery requests, preparing for and attending mediation, preparing for and attending depositions, and preparing for and attending trials.  Diversion of that many hours at hourly rates ranging $100 to $200 per hour from income-generating work to defend a meritless lawsuit for wrongfully-withheld fees constituted losses under the contract.  Accordingly, the court found no error in the lower court’s decision to award $62,190 in losses.

The full opinion is available in PDF.

Charles and Margaret Levin Family Limited Partnership v. Greenberg Family Limited Partnership (Cir. Ct. Mont. Cnty)

Filed:  December 27, 2016

Opinion by:  Ronald B. Rubin

Holding:  Judicial dissolution is an inappropriate remedy for deadlock over the identity of a managing member of an LLC where an LLC’s members have (1) a reasonable exit mechanism to receive fair value for their interest and (2) the Operating Agreement provides an alternative dispute resolution mechanism such as arbitration.

Facts:  Plaintiff and Defendant, each a family limited partnership involved in a series of commercial real estate transactions since the late 1980’s, jointly operated a lucrative office and retail complex.  Originally a general partnership, the joint venture’s organizational structure in 1999 converted to an LLC whose members were Plaintiff and Defendant, each with a 50% stake.

The Operating Agreement provided that Defendant would be the managing member with an initial 5-year term, followed by one or more successive 3-year terms if members unanimously consented to each successive term.  Expiration of the initial term was met with acquiescence by both parties, and Defendant continued to serve as managing member of the LLC.

By 2013, operation of Plaintiff’s family business had passed through several hands and a separation of interests was proposed.  Negotiations were contentious and unsuccessful.  By late 2014, Plaintiff accused Defendant of material breach of the operating agreement, alleging improper authorization of an increased property management fee and exceeding its term as managing member without consent.  At a members’ meeting, Defendant agreed not to increase the management fee, but refused to step aside as managing member.

Pursuant to the Operating Agreement, Plaintiff in 2014 filed a demand for arbitration to remove Defendant as managing member.  Defendant filed a complaint in circuit court seeking a declaratory judgment that the matter was not subject to arbitration.  Each party then withdrew their demands and attempted to negotiate a resolution.  Negotiations ultimately failed, and Plaintiff filed the instant suit in mid-2015.

Plaintiff sought relief in the form of a declaration that Defendant’s term as managing member had expired, and judicial dissolution of the LLC.  Defendant generally denied the allegations, sought a declaration that Defendant could remain as managing member, and requested that judicial dissolution be found an inappropriate remedy in such a dispute.

In March 2016, the court denied cross-motions for summary judgment and set a trial date for November.  By June, Plaintiff filed an amended complaint alleging the parties were deadlocked, and moved for a preliminary injunction for Defendant’s removal as managing member.  Plaintiff again requested judicial dissolution, but alternately requested appointment of a special fiscal agent.

At a preliminary injunction hearing in July, the court granted the motion in part, ordering removal of Defendant as managing member, but denied the request for judicial dissolution.  At the hearing, the court learned that the property management firm, although an affiliate of Defendant, had run day-to-day operations for over fifteen years without serious complaint.  The court found the parties’ unaddressed disagreements to be premised on the unsuccessful attempts to wind up the business, and allowed the property management firm to carry on in conformity with the Operating Agreement despite absence of a managing member.

In October, Defendant moved again for summary judgment, arguing that its removal as managing member rendered the complaint moot, and that any remaining operational or management disputes could be resolved by pursuing arbitration according to the Operating Agreement.  The court denied the motion in favor of full examination of the parties’ relationship, motive, and intent.

Analysis:  The court began by evaluating Plaintiff’s contention that judicial dissolution was the only remedy in light of the fact that without a managing member, the LLC could neither operate generally, nor operate in conformity with its Operating Agreement.  Examining the Operating Agreement, the court found several sections reserving sole authority to bind the LLC to the Managing Member or its specially authorized agents.  Further, the Operating Agreement plainly stated that mere status as a member did not vest with capacity to bind the LLC.  Noting that the practice of stockholders running a corporation might vitiate the protections of the corporate shield, the court concluded that leaving Plaintiff and Defendant as mere members would be improper.  Nor was the property management firm an appropriate substitute for a Managing Member.

The court went on to cite Maryland statutory law, noting that while judicial dissolution is appropriate only when “it is not reasonably practicable to carry on the business in conformity with the articles of organization or the operating agreement,” the statute failed to adequately define the phrase.  Md. Code Ann. Corps & Assn’s Art. §4A-903 (2015).  Nor had Maryland courts definitely construed the statutory language.  The court therefore looked to extent to which deadlock frustrated the purpose to which the LLC was created.  Finding Defendant, as prior Managing Member, had not abused its authority, unjustly enriched itself, or harmed Plaintiff’s economic interests, the court determined the business purpose of the LLC to have been faithfully fulfilled.

The court countenanced that judicial dissolution might have been appropriate but for the fact that the Operating Agreement specifically provided for arbitration as a dispute resolution mechanism.  Although Defendant reversed its initial pre-trial position that appointment of a managing member was not a proper subject of arbitration, Plaintiff failed to argue that Defendant was judicially estopped from taking this position.  Regardless, the court stated that because both parties’  2014 filings had been withdrawn voluntarily prior to the instant suit, judicial estoppel would not have precluded Defendant from taking such a stance.

Finding no ambiguity in the Operating Agreement’s dispute resolution mechanism, the court deemed judicial dissolution to be unnecessary.  The court went on to comment that the Operating Agreement also provided a reasonable exit mechanism in a dissenting member’s ability to exit and receive the fair value of its interest.  Subject to a right of first refusal with notification requirements, Plaintiff could have solicited offers for its interest, but failed to do so.  Further, Defendant in 2015 offered 50% of the appraised value of the joint venture.  Finding the price to be a premium over fair market value (given the limited marketability and/or lack of controlling interest), the court was satisfied in denying the request for judicial dissolution, finding arbitration to be a fair and equitable result.

The full opinion is available in PDF.

Stewart v. Jayco, Inc. (U.S.D.C.)

Filed: January 18, 2017

Opinion by: Ellen L. Hollander, United States District Judge

Holding:

In finding that no personal jurisdiction exists, the Court follows Maryland Court of Appeals precedent, applying a two-part test: (1) whether the requirements of Maryland’s long-arm statute are satisfied; and (2) whether the exercise of personal jurisdiction comports with the requirements imposed by the Due Process Clause of the Fourteenth Amendment.

Facts:

Plaintiffs  are Maryland residents who, on August 29, 2015, purchased a 2016 Jayco Seneca Motorhome from Camping World RV Super Center, a dealer located in Fountain, Colorado. Plaintiffs paid $153,081.90 for the Motorhome, which they allege has “been plagued by non-stop problems arising from defects in the manufacturing of the vehicle,” arguing violations of the Magnuson-Moss Warranty Act. Camping World RV Sales in Hanover, Pennsylvania and Camping World RV Super Center in Fountain, Colorado serviced the vehicle.

Defendant manufactured the Motorhome in question. Defendant relies on a declaration by Craig Newcomer, Consumer Affairs Manager of “Jayco Motorhome Group,” arguing Defendant has no ties to Plaintiff or the state of Maryland. Newcomer avers that Jayco does not maintain an office in Maryland; does not have any employees in Maryland; does not own any real estate in Maryland; has no bank accounts in Maryland; and does not directly advertise in Maryland. In addition, Defendant asserts it is not licensed to do business in Maryland and does not “directly” pay any taxes in Maryland.

In alleging that Defendant is transacting business in Maryland, Plaintiff relies on the fact that Defendant has a dealer in Maryland and that Defendant maintains a website that directs customers to dealers operating within Maryland. According to Newcomer, Defendant’s dealers are independently owned and operated and there is only one dealer in Maryland, (Chesaco) which holds three locations in Maryland, and with whom Plaintiffs never interacted.

Analysis:

           

 Reviewing the facts in a light most favorable to the Plaintiff, the Court addresses the issue of personal jurisdiction as a preliminary matter, determining whether the Plaintiff made his requisite prima facie showing. Furthermore, a threshold prima facie finding that personal jurisdiction is proper does not finally settle the issue; plaintiff must eventually prove the existence of personal jurisdiction by a preponderance of the evidence, either at trial or at a pretrial evidentiary hearing.

According to Fed. R. Civ. P. 4(k)(1)(A), a federal district court may exercise personal jurisdiction over a defendant in accordance with the law of the state in which the district court is located. Thus, the Court looked to Maryland law, which provides, “to assert personal jurisdiction over a nonresident defendant, two conditions must be satisfied: (1) the exercise of jurisdiction must be authorized under the state’s long-arm statute; and (2) the exercise of jurisdiction must comport with the due process requirements of the Fourteenth Amendment.” Carefirst of Maryland Inc. v. Carefirst Pregnancy Ctrs., Inc., 334 F.3d at 396; Carbone v. Deutsche Bank Nat’l Trust Co., No. CV RDB-15-1063, 2016 WL 4158354, at *5 (D. Md. Aug. 5, 2016).

           

Relying on Carbone, the Court held “when interpreting the reach of Maryland’s long-arm statute, a federal district court is bound by the interpretations of the Maryland Court of Appeals.” See Carbone, 2016 WL 4158354 at *5. “The Maryland Court of Appeals has ‘consistently held that the reach of the long-arm statute is coextensive with the limits of personal jurisdiction delineated under the due process clause of the Federal Constitution’ and that the ‘statutory inquiry merges with the constitutional examination.’” See Beyond Systems, Inc. v. Realtime Gaming Holding Co., 388 Md. 1, 22, 878 A.2d 567, 580 (2005). While the Maryland Court of Appeals recognizes a two-step analysis is standard, the Maryland Court of Appeals, and thus this Court, also recognize that, in some situations, exceptions exist wherein courts may decline to consider the first step if the analysis of the second step demonstrates conclusively that the personal jurisdiction over the defendant would violate due process. See Bond v. Messerman, 391 Md. 706, 721, 895 A.2d 722, 895 (2006). According to the Court, this case falls within this exception.

In evaluating whether a nonresident defendant is subject to personal jurisdiction under due process requirements, the Court looks to the United States Supreme Court, which has long held that personal jurisdiction over a nonresident defendant is constitutionally permissible so long as the defendant has “minimum contacts with [the forum state] such that the maintenance of the suit does not offend ‘traditional notions of fair play and substantial justice.’” International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). Courts have separated this test into two individual prongs: (1) the threshold of “minimum contacts,” and (2) whether the exercise of jurisdiction on the basis of those contacts is “constitutionally reasonable.” Due process jurisprudence recognizes “two types of personal jurisdiction: general and specific. CFA Inst. V. Inst. Chartered Fin. Analysts of India, 551 F.3d 285, 292 n. 15 (4th Cir. 2009). The Court determines that Defendant is not subject to general or specific personal jurisdiction, and as a result, the Court grants Defendant’s Motion to Dismiss.

In concluding no general personal jurisdiction exists, the Court relies on the rule from Goodyear, which states a court may exercise general jurisdiction over foreign corporations to hear “any and all claims” against the corporations “when their affiliations with the State are so ‘continuous and systematic’ as to render them essentially at home in the forum State.” Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915, 919 (2011). The Court also relies on Daimler, where plaintiffs sought to exercise general personal jurisdiction over defendant in California. Citing Burger King, the court of Daimler explained that Daimler, defendant, was neither incorporated in California nor did it maintain its principal place of business in California, and thus, “such exorbitant exercises of all-purposes jurisdiction would scarcely permit out-of-state defendants ‘to structure their conduct with some minimum assurance as to where that conduct will and will not render them liable to suit.’” Daimler AG v. Bauman, 134 S.Ct. 760 (2014).

In light of the facts at hand, the Court argues, “although Plaintiffs point to some contacts that Defendant maintains with Maryland, those contacts are not so continuous and systematic as to ‘render [Defendant] essentially at home in the forum state.’” Goodyear, 564 U.S. at 919. In addition, the court heavily relies on the fact that Defendant is not incorporated in Maryland; it is not registered and qualified to do business in Maryland; it has no employees in Maryland; and it does not maintain an office in Maryland. Regarding the Maryland dealership, the Court notes Chesaco also sells other brands of recreational vehicles, and that Defendant only passively directs customers in Maryland to purchase its products from Chesaco. Chesaco is independently owned and operated. For the above reasons, the Court ultimately concludes no general personal jurisdiction exists.

To determine whether there is specific jurisdiction over a defendant, the Court considers: “(1) the extent to which the defendant purposefully availed itself of the privilege of conducting activities in the state; (2) whether the plaintiffs’ claims arise out of those activities directed at the State; and (3) whether the exercise of personal jurisdiction would be constitutionally reasonable.” Consulting Eng’rs Corp. v. Geometric Ltd., 561 F.3d at 278 (4th Cir. 2009). The Court further relies on Burger King, where the court explains, “the ‘benchmark’ is not the ‘foreseeability of causing injury in another state.’ Rather, it is ‘foreseeability . . . that the defendant’s conduct and connection with the forum State are such that he should reasonably anticipate being haled into court there.’” Burger King Corp. v. Rudzewicz, 471 U.S., at 474 (1985).

Here, the Court finds no specific personal jurisdiction. The Court bases its determination on the fact that Plaintiffs did not purchase their Motorhome from or through Defendant’s Maryland dealer, nor did Plaintiff allege that they used Defendant’s website or that Defendant was in any way involved with Plaintiff’s decision to purchase a Jayco Motorhome in Colorado. Furthermore, the Court notes that after Plaintiffs bought the Motorhome in Colorado, they had it serviced and repaired in Pennsylvania. Plaintiffs failed to allege that any contacts between Defendant and the state of Maryland are related to, or give rise to, the cause of action. For the foregoing reasons, the Court concluded no specific personal jurisdiction exists.

In sum, although Defendant has some contacts with the state of Maryland, Plaintiff failed to establish that such contacts satisfy its prima facie requirement for either general or specific jurisdiction to support a finding of this Court’s personal jurisdiction over Defendant.

The opinion is available in PDF. 

Oliveira v. Sugarman (Ct. of Appeals)

Filed: January 20, 2017

Opinion by J. Adkins

Holding:  (1) The traditional business judgment rule applies to a disinterested and independent board of directors' refusal of a stockholder litigation demand, not the modified business judgment rule established in Boland v. Boland, 423 Md. 296 (2011). (2) Conversion of a performance-based incentive plan approved by stockholders to a service-based incentive plan approved by a board of directors does not give rise to a direct stockholder claim. (3) An incentive plan approved by stockholders does not constitute a contract unless such plan contains language "indicating a clear offer and intent to be bound." (4) Even when a corporation owes a direct duty to its stockholders, a stockholder must have suffered an injury distinct from the corporation to bring a direct claim.

Facts:  The board of directors of a Maryland corporation (the "Company") granted performance-based restricted stock (the "Original Awards") to certain of its executives and employees; however, the Company did not have enough common stock authorized to pay these Original Awards if they vested. In a letter to stockholders from the CEO, accompanied by the annual proxy statement, the CEO asked stockholders to approve the proposed long-term incentive plan (the "Plan"). The mailing also included a copy of the Plan, which authorized the issuance of an additional eight million shares of common stock. The Plan was approved at the annual meeting. The Company, however, did not meet the performance metrics for the Original Awards to vest until eight trading days past when the Original Awards were to vest. The board of directors and its compensation committee, in consultation with its advisors, decided to convert the Original Awards to service-based awards (the "Modified Awards") to balance rewarding management’s performance and enforcing the terms of the Original Awards.

Plaintiffs, trustees of a stockholder of the Company, made a demand to the board of directors to investigate the Modified Awards and institute claims on behalf of the Company against "responsible persons." The board of directors appointed an outside, non-management director to serve as the demand response committee. After investigation that included assistance from outside counsel, the demand response committee recommended the board of directors refuse the stockholder demand, which it did after a unanimous vote. Plaintiffs filed suit against the members of the board of directors and senior management alleging breach of fiduciary duty, unjust enrichment, waste of corporate assets, breach of contract and promissory estoppel arising from the Modified Awards. The Court of Special Appeals affirmed the trial court’s dismissal of Plaintiffs’ claims, holding that the trial court correctly applied the business judgment rule and Plaintiffs’ failed to plead facts sufficient to overcome the presumption of the business judgment rule.

Analysis: The Court refused to expand the modified business judgment rule established in Boland to all board of director decisions refusing a stockholder litigation demand, regardless of whether a majority of the directors are disinterested or the board used a special litigation committee ("SLC"). After a discussion of the development of the business judgment rule in Maryland, the Court distinguished this case from Boland because a majority of the board of directors of the Company were disinterested and independent as only one of the six directors at the time the Amended Awards were made actually stood to financially benefit from the board's decision (even Plaintiffs agreed that the board consisted of a majority of disinterested and independent directors when it approved the Amended Awards). Plaintiffs argued that, by refusing to extend the modified business judgment rule to any denial by a board of directors of a stockholder litigation demand, enhanced scrutiny by the courts would be limited "to those rare instances when shareholders are not required to make a demand on the board before bringing suit" and thus the modified business judgment rule would be rarely applied. The Court explained that Boland was not concerned with the feasibility of stockholder derivative suits and was intended to address those situations where a board of directors does not have a disinterested majority and appoints an SLC because the courts wanted to ensure the SLC was not "serving as a puppet for the interested board."

Turning next to whether the claims asserted by Plaintiffs were direct or derivative, the Court held that Plaintiffs did not suffer "a 'distinct injury' separate from any harm suffered by the corporation." Plaintiffs claimed they suffered three harms giving rise to a direct claim. First, they claimed to have suffered harm when the Original Awards were converted to the Modified Awards because the Company could no longer take advantage of the tax exemption provided for under § 162(m)(4)(C) of the Internal Revenue Code because, unlike the Original Awards, the Modified Awards were no longer made in connection with a stockholder-approved performance plan. Even though the Court noted that this alleged increased tax cost actually resulted in damages to the Company, not Plaintiffs’, they maintained that the Plan granted them contact rights that they could enforce directly. Applying New York law (the Plan was approved in New York and expressly provided it was governed by New York law), the Court held that the Plan was not a contract because it contained no offer to stockholders. The Court also held that, under Maryland law, the Plan was not part of a larger "intra-corporate contract" between directors and stockholders.

Second, Plaintiffs claimed as a direct harm that the actions of the board of directors caused them to make an uninformed vote. Relying on the doctrine of promissory estoppel, Plaintiffs argued that the board promised them the Original Awards would vest only if the performance metrics outlined in the Plan were met and that this promise induced Plaintiffs to vote to approve the Plan. The Court acknowledged that the language in the letter to stockholders that accompanied the proxy statement did urge approval of the Plan and stated that the Original Awards would vest "only if performance conditions are achieved." The proxy statement contained the same assurance and, the Court found that "[t]his language could constitute a clear and definite promise on the part of the Board." The Court also found that the board of directors had a reasonable expectation that its promises to stockholders regarding the vesting of the Original Awards would induce stockholders to approve the Plan because, in language in the letter to stockholders, the board stated its belief that "the significant shareholder returns required in order to meet the performance hurdles of these proposed equity incentive awards…make the overall compensation strategy a compelling one for shareholders." Further, the stockholders did in fact approve the Plan. However, the Court held that Plaintiffs’ were unable to meet the fourth element of their promissory estoppel claim. Looking to Delaware law, the Court held that casting an uninformed vote in and of itself is not sufficient harm to support a claim for promissory estoppel – Plaintiffs’ would need to show individual damages resulting from their uninformed vote, which they had not done.

Plaintiffs next claimed that they suffered a direct harm because the Plan diluted the value of their shares in the Company. The Court agreed that, under certain circumstances, "financial harm due to stock dilution could support a direct shareholder claim"; however, the Court held that such a circumstance did not exist in this case. Plaintiffs had not alleged share dilution in their complaint and, while they argued dilution on appeal, they failed to allege any facts detailing the financial or other impact of the alleged dilution.

Finally, Plaintiffs claimed that, even if they had not suffered a distinct harm, the Plan created a direct duty owed to stockholders by the board of directors and thus they should be able to bring a direct claim. While the Court acknowledged that a stockholder may bring a direct action if the board of directors breached a duty owed to stockholders, it held that the breach of duty alone is not sufficient to bring a direct claim – there must be some separate harm suffered. Therefore, to bring a direct claim, a stockholder would have to show that it suffered a harm distinct from the corporation as a result of the breach of duty owed by directors to stockholders.

The full opinion is available in PDF.  The author of this post is an attorney at Venable LLP, which represented the Company.  

St. Paul Mercury Insurance Company v. American Bank Holdings, Inc. (4th Circuit)

Filed: April 14, 2016

Opinion by: Niemeyer

Holding:  Service of process on a Maryland corporation’s resident agent constitutes service of process on the corporation.

Facts:  Defendant’s resident agent was served with a complaint and summons issued from a state court in Illinois on June 18, 2008.  Due to an internal oversight, defendant did not respond to the summons and the court entered a default judgement against it.  Eight months after receipt of the summons and after efforts to collect on the default judgment began, defendant notified its insurer of the lawsuit. 

The insurance policy provided that the insurer must be given written notice of any “claim … as soon as practicable.”  The policy also provided that a claim commenced on “the service of a complaint.”  Insurer denied coverage because of the late notice.  

Defendant eventually had the default judgment vacated and the lawsuit dismissed, which cost defendant $1.8 million.  Insurer sought a declaratory judgment that it had no duty to pay for the defense.  The district court ruled that “constructive notice via service of process on the insured’s resident agent, constitute[d] actual notice for purposes of triggering” its obligation to notify insurer and found the insurer to be within its right to deny coverage.  The Court affirmed. 

Analysis:  Defendant argued that its obligation to notify insurer was not triggered until it had actual knowledge of the complaint, which occurred after attempts to collect the default judgment began.  The Court noted that the Maryland General Corporation Law requires each corporation to designate a resident agent to receive service of process and further provides that service of process on the resident agent “constitutes effective service of process … on the corporation.”  Thus, the Court found service on the resident agent to be effective service on defendant, which triggered defendant’s duty to notify insurer “as soon as practicable.”

Defendant argued that it was not effectively served because its CFO was no longer employed when the resident agent forwarded the lawsuit papers to the CFO on June 19, 2008.  The Court stated that internal “corporate screw-ups” do not provide a basis to excuse providing timely notice to its insurer.  Rather, the Court stated that under Maryland agency law “knowledge of an agent acquired within the scope of the agency relationship is imputable to the corporation.”  Accordingly, the Court found that, under Maryland agency law, the defendant had actual knowledge of the lawsuit on the day its resident agent was served with process. 

The Court found the district court properly rejected defendant’s waiver and estoppel arguments. 

The opinion is available in PDF.