Stalker Brothers, Inc., et al. v. Alcoa Concrete Masonry, Inc. (Ct. of Appeals)

Filed: October 24, 2011
Opinion by Judge Joseph F. Murphy Jr.

Held: The Maryland Home Improvement Law does not render a contract between a home improvement general contractor and an unlicensed subcontractor unenforceable. The statute was intended to protect the public under contractor-owner contracts and not contracts between contractors who engage in arms-length transactions with one another.

Facts: Alcoa Concrete Masonry, Inc. ("Plaintiff") was an unlicensed subcontractor providing work for Stalker Brothers, Inc. ("Defendant") on contract. The two companies did business together from 2004 to 2007. Payments were regular at first but the Defendant started to miss payments in 2005 and after an attempt to reconcile the amount due among themselves the Defendant began to miss payments again, eventually refusing to pay the Plaintiff altogether.

The Plaintiff contended that they had been intentionally misled by the Defendant and that the Defendant had signed Releases of Liens stating that all subcontractors had been paid for the work when in fact the Defendant knew they had not paid the Plaintiff thereby gaining access to funds not rightfully theirs. As a defense the Defendant claimed that the Plaintiff had preformed this residential home improvement work while an unlicensed subcontractor in Maryland and as such contracts made by such an unlicensed subcontractor were illegal and unenforceable under the Maryland Home Improvement Law.

Analysis: In broad agreement with the opinion of the Court of Special Appeals [see HERE for a prior blog entry regarding the Court of Special Appeals opinion] the Court of Appeals applied the "revenue/regulation rule". Using this rule the Court distinguished between a contract between an owner and contractor as a contract covered under the Maryland Home Improvement Law, and a contract between a contractor and a subcontractor as not covered under this statute. The Court found that the purpose of the Maryland Home Improvement Law is to protect the public and not a method by which contractors could escape liability for past due amounts due to subcontractors that were unlicensed at the time they performed the contract.

The full opinion is available in PDF.

Ramlall v. Mobilepro Corp. (Ct. of Special Appeals)

Filed: October 28, 2011

Opinion by: Judge Albert J. Matricciani, Jr.

Held: A corporate veil may only be pierced to prevent fraud or to enforce a paramount equity. Without precedent from the Court of Appeals, the Court of Special Appeals declines to guess what a paramount equity may be. In addition, a "forward triangular merger," by which an acquiring company secures the benefit of limited liability for a target company's debts, is not fraudulent so as to create grounds for piercing the corporate veil.

Facts: The plaintiff was hired by a company to negotiate a billing dispute among the company and and its telephone service provider. Before the plaintiff could collect his fee, the company that hired him (the "Dissolved Company") merged with another company (the "Surviving Company") and was dissolved. The Surviving Company was wholly owned by a parent (the "Parent"), and had been formed for the purpose of merging with the Dissolved Company.

Neither the Surviving Company nor the Parent paid the plaintiff's fee. The plaintiff sued them both - the Surviving Company as the successor to the Dissolved Company, and the Parent as an entity responsible for the debts of the Surviving Company. The Circuit Court granted the Parent's motion for summary judgment. After a trial of the claim against the Surviving Company, the Court granted a motion for judgment in favor of the Surviving Company on the ground that a transaction disclosure agreement stated the terms by which the plaintiff was to be paid, and the plaintiff was not entitled pursuant to those terms. The plaintiff appealed.

Analysis:
Summary Judgment for the Parent: The plaintiff argued that the Parent exercised sufficient control over the Surviving Company to justify piercing the corporate veil. Referencing the Court of Appeals' decision in Bart Aconti & Sons, Inc. v. Ames-Ennis, Inc., the Court affirmed the black-letter principle that it may pierce the corporate veil only based on proof of fraud or necessity to enforce a paramount equity.

In response to the plaintiff's argument that his claim was a paramount equity, the Court noted that "notwithstanding its hint that enforcing a paramount equity might suffice . . ., the Court of Appeals has not elaborated upon the meaning of this phrase or applied it in any case of which we are aware." Accordingly, "with no precedent approving this extraordinary remedy," the Court declined to pierce the corporate veil on that ground. Regarding alleged fraud, the Court rejected the contention that the merger scheme (a "forward triangular merger") was a fraudulent action.

Judgment for the Surviving Company: The Plaintiff argued that the Dissolved Company owed him money based on the benefit he provided in negotiating its dispute. In addition, if the Dissolved Company owed him money, then after the merger, the obligation to pay became the Surviving Company's obligation.

The Court discussed in detail the case law and statutory law providing that, when there is a merger, "the successor is liable for all the debts and obligations of each non-surviving corporation." Accordingly, any obligation of the Dissolved Company to pay the plaintiff was an obligation of the Surviving Company. The question remained, what was that obligation?

Regarding the obligation, the Court found that both sides presented conflicting evidence concerning the terms of the oral agreement to pay. In addition, there was additional evidence to be adduced during the defendant's case. The Court held that, even though it was a bench trial, it was a mistake for the trial court to rely upon the transaction's disclosure statement as dispositive of the disputed oral agreement. In doing that, the trial court disregarded substantial evidence that the statement was not an accurate representation of the agreement.

Accordingly, the Court vacated the judgment in favor of the Surviving Company and remanded for the trial court to receive all the evidence and determine the terms of the agreement.

The full opinion is available in .pdf.

Jackson v. Dackman (Ct. of Appeals)

Filed: October 24, 2011

Opinion by: Judge John C. Eldridge

Held: Immunity provisions of the Reduction of Lead Risk in Housing Act which, under specific conditions, grant immunity to a rental property owner from personal liability suits arising from lead paint poising, are invalid under Article 19 of the Maryland Declaration of Rights.

Facts: The case involves two rental properties, which were owned and maintained by defendants. In January 2007, plaintiff and her daughter moved into the first property when the daughter was one year old. When the lease was first executed, the tenants failed to note any defective conditions. Nevertheless, paint chipped and flaked throughout the apartment, which plaintiff’s daughter ingested, causing her to suffer from lead poising. In February 1999, plaintiff and her daughter moved to the second property, which had been inspected pursuant to the Reduction of Lead Risk in Housing Act and represented as lead-free. However, similar to the first property, paint chipped and flaked throughout the apartment, which the daughter again ingested. Plaintiff brought suit against the defendants and sought damages based on her daughter’s severe and permanent brain injuries allegedly resulting from ingestion of lead-based paint.

Analysis: Section 6-828 of The Reduction of Lead Risk in Housing Act grants immunity from personal injury suits to a rental owner who has complied with the statute, unless notice is given to the owner and the owner has been given the opportunity to make a qualified offer to the person at risk or to a parent or legal guardian of a minor. The statute sets forth specific blood-lead levels at which the tenants are required to give notice to rental owners. The Act also caps the maximum amount payable under a qualified offer to $17,000, which includes medical and relocation expenses. The Act provides that acceptance of a qualified offer releases the owner from all potential liability. It further states that if the qualified offer is rejected “[a]n owner of an affected property is not liable, for alleged injury or loss caused by ingestion of lead by a person at risk in the affected property.”

An issue presented to the court focused on whether the immunity provisions in the Act were invalid under Article 19 of the Maryland Declaration of Rights. Article 19 establishes the right to a remedy for a person who experiences an injury to person or property. The Court explained that the remedy may be found at common law, or substituted by the legislature through statute. The general inquiry, under Article 19 jurisprudence, “is whether the abolition of the common law remedy and substitution of a statutory remedy is reasonable.” Article 19 permits the legislature to impose a reasonable limit upon non-economic damages recoverable in tort cases. The Court, while reaffirming that some restrictions upon judicial remedies have been upheld -- including certain well-established immunities, ultimately held the immunity provisions of the Act to be unreasonable.

The immunity granted by the Act was not a well-established immunity in personal injury actions because it did not exist prior to the enactment of the statute in 1994. Under the Act, the only remedy offered in substitution for a personal injury action is a qualified offer by the owners which is accepted by a “person at risk, or a parent or legal guardian of a minor who is a person at risk.” The Court noted that the statute did not provide a remedy where no qualified offer was made. In addition, under the statute, the maximum compensation that may be offered is $17,000, which the Court deemed “minuscule” for a child who is found to be permanently brain damaged. Thus, the Court reasoned, “the remedy which the Act substitutes for a traditional personal injury action results in either no compensation (where no qualified offer is made or where a qualified offer is rejected) or drastically inadequate compensation (where such qualified offer is made and accepted).”


Furthermore, the Act has no exception to the owner’s immunity in the situation where an injured child reaches the age of majority and attempts to bring, in his or her own name, a personal injury action against the owner. The Court held, that because no adequate remedy was substituted for the grant of immunity, the immunity provisions of the Act were unreasonable and therefore invalid under Article 19. However, the Court found that the invalid provisions were severable from the rest of the statute, ultimately upholding the Act.

The full opinion is available in pdf. 

Suntrust Bank v. Goldman (Ct. of Special Appeals)

Filed: September 30, 2011
Opinion by: Judge James R. Eyler

Held: The prevailing party in a suit for breach of a line of credit agreement may only be awarded attorneys' fees in the amount of fees actually incurred (including future fees that can be proven with certainty), notwithstanding contract language allowing for recovery of a greater sum measured as a percentage of the principal loan amount.

Facts: A borrower entered into a line of credit agreement with a bank. The agreement contained a clause that stated that the borrower would be responsible to pay any costs of collection for failure to pay on the loan, including 15% of the principal as attorneys' fees or reasonable attorneys' fees. The borrower defaulted and the bank sued. The borrower failed to answer, and the trial court awarded the bank an order of default for the principal amount due and interest. The bank also asked the court for attorneys' fees in the amount of $60,206.00, or 15% of the principal. The court denied this request and only awarded attorneys' fees in the amount of $3,258.30, or the actual fees incurred to date plus costs. The bank filed a motion to revise judgment to award attorneys' fees as provided in the contract, which the trial court denied. The bank appealed.

Analysis: The Court of Special Appeals affirmed.

The bank argued that it sought the 15% fee to cover actual fees, as well as fees it may incur in the future as a result of efforts to enforce the judgment. The bank pointed out that if it were denied that fee, it would not be able to sue to enforce the provision after final judgment due to the doctrine of merger.

The Court stated that attorneys' fee provisions are in the nature of indemnity agreements. The Court explained that "Maryland law limits the amount of contractual attorneys fees to actual fees incurred, regardless of whether the contract provides for a greater amount." The Court distinguished this case from Webster v. People's Loan, Sav. & Deposit Bank of Cambridge, 160 Md. 57 (1976) that contained language by the Court of Appeals that supports the bank's claim for the 15% attorneys' fee then later crediting the appellees with the amount of fees not actually incurred. This Court distinguished Webster because it dealt with a judgment by confession when confessed judgments were entered by the clerk of the court based on the terms of the underlying note. Now, the Court explained, the procedure is different. Md. Rule 2-611, amended in 2010, includes a new section (b) which "requires a court to review a confessed judgment for factual and legal validity before the clerk may enter the judgment." Therefore, judicial review of confessed judgment is now done at the outset where the reviewing court can make a determination as to the reasonableness of the attorneys' fees.

The bank explained that it should be able to claim un-incurred fees, subject to later credit because the merger doctrine does not allow a party to seek post-judgment requests for attorneys' fees for which the court has already entered judgment. The Court discusses various ways to avoid the merger bar, including for the parties to state their intent in the contract that the fee provision shall not merge into the judgment (without specifying how this would be done).

The Court concluded that in order to collect both incurred fees and future fees, the requesting party will need to put on evidence of fees that it will certainly incur in the future, as well as those fees actually incurred at that time, as long as they are reasonable. Because the bank presented no evidence as to any agreement to pay attorneys' fees other than on an hourly basis and no evidence to provide fees certain to be incurred in the future, the Court concluded that the trial court had properly awarded only incurred attorneys' fees to the bank.

The full opinion is available in pdf.

In re Nationwide Health Properties, Inc. S'holder Litig. (Cir. Ct. Balt. City)

Filed: May 25, 2011

Opinion by: Judge Stuart R. Berger

Held: When stating a claim for breach of fiduciary duty by the board of directors in a stock-for-stock merger, the duty of profit maximization under Shenker v. Laureate Education, Inc. does not apply.

Facts: The Board of Directors (the Board) of Nationwide, a publicly traded Maryland corporation and REIT with investments primarily in healthcare property in the United States, sought the advice of financial advisers on potential merger opportunities. Over a period of three months Nationwide actively pursued a deal with two of these opportunities. After some back-and-forth with the two potential acquiring companies the Board went with the company that offered them a firm, but slightly lower, price than the other.

Analysis: Plaintiffs attempted to use Shenker v. Laureate Education, Inc. to impose a duty of maximizing shareholder value on the Board. The Court distinguished the "cash-out" merger in Shenker as a different transaction from that of a "stock-for-stock" merger. In Shenker the duty of profit maximization was placed upon that board since the transaction was a "cash out" merger, where shareholders are given cash for their stocks, potentially forcing minority shareholders to accept a cash payment, effectively eliminating their interest in the target company and leaving them with no interest in the acquiring company. In a "stock-for-stock" merger, as is the case here, the current shareholder's equity is exchanged at a fixed conversion rate for shares in the acquiring company. The profit maximization standard may only be applied in a "cash-out" merger situation due to the finality of the decision by the board in such a merger as opposed to the current situation where shareholders will maintain an interest in the merged company. The Court noted that if it were to adopt the plaintiffs' reasoning, then there would be a duty of profit maximization in every merger, in direct opposition to existing case law.

The plaintiffs also argued the "stock-for-stock" purchase is effectively a change in control. The Court disagreed and cited the Delaware Supreme Court, which held where "control of both [companies] remains in a large, fluid, changeable and changing market, "directors do not have to obtain the highest possible value for shareholders since the asset remains liquid and easily sold or transferred in the broader market. A "stock-for-stock" merger is essentially a managerial function and there is no duty to maximize shareholder value, as opposed to a cash-out merger where this duty may be imposed. Further, Maryland corporation law reflects the same principle, "[A] stock-for-stock merger will not be a change of control..." (Hanks, Maryland Corporation Law § 6.6(b)). As the plaintiffs did not sufficiently plead facts supporting their change of control argument, the Court did not impose a duty of profit maximization on the Board.

The Court stated the proper analysis of the merger is under the Maryland Business Judgment Rule. To rebut the presumption, the plaintiffs needed to introduce evidence of director self-interest or self-dealing, or that the directors lacked good faith or failed to exercise due care. The allegations in the complaint did not allege a fraud, but rather self-dealing and negligence leading to substantially lower consideration for their shares. The plaintiffs did not show that interests such as early vesting of stock options influenced a majority of the Board in approving the transaction. The allegations of a breach of acting in the interest of the corporation must establish a link between the material benefit and the Board's decision to approve the merger transaction - absent this, allegations of self dealing are conclusory.

A breach of good faith is not met when the Board is presented with two rational options and chooses one that turns out to be less advantageous than the other. To succeed in showing a lack of care, the plaintiffs must show gross negligence was committed by the Board. Courts have held that boards are justified in accepting a lower but more firm offer over one that is higher but more speculative and that a board may act decisively to preserve an offer. The Court did not find such gross negligence was committed by the Board and the claim was dismissed with prejudice.

Lastly, the plaintiffs alleged a breach of the duty of candor. The Court found the complaint failed to state how any of the alleged omissions were material because the plaintiffs made no attempt to explain how the additional information they sought would alter the "total mix" of information made available in the lengthy report provided to shareholders. Accordingly, the plaintiff's disclosure claims were dismissed with prejudice.

The full opinion is available in pdf.

Oliver v. Crump (Maryland U.S.D.C.)

Filed: September 15, 2011

Opinion by: Judge Ellen Lipton Hollander

Held: In a suit alleging breach of fiduciary obligations of directors of a corporation, a Maryland court may exercise personal jurisdiction over out-of-state directors of a Maryland corporation that conducts its business operations in Maryland.

Facts: Defendants were directors, officers and employees of a Maryland corporation. Plaintiff alleged defendants acted in a course of misconduct. All of the defendants reside in Delaware.

Analysis: A court exercising personal jurisdiction over non-resident defendants does not violate the due process clause of the U.S. Constitution when the defendants have "minimum contacts" in the state and "the exercise of jurisdiction based on those contacts is constitutionally reasonable." The Court applied the logic of Pittsburgh Terminal Corp. v. Mid Allegheny Corp., 831 F.2d 522 (4th Cir. 1987), which involved a West Virginia corporation and directors who lived in the State of Virginia.

In Pittsburgh Terminal, the Fourth Circuit held "the acceptance of a directorship constitutes minimum contacts in a derivative suit." The Court also found minimum contacts because, among other reasons, (a) Maryland law, like West Virginia law, provides the business and affairs of the corporation shall be managed under the direction of a board of directors, (b) directors participate in business decisions that have a primary effect in the forum state and (c) by becoming directors, the defendants purposefully availed themselves of the privilege of doing business in that state.

Turning to the constitutional reasonableness portion of the due process test, the Court cited Pittsburgh Terminal, which noted the factors of the case made the "assertion of jurisdiction more reasonable." The Court agreed. As in Pittsburgh Terminal, the defendants live in a neighboring state. Maryland has a strong interest in providing a forum to hear a claim alleging wrongful acts by the directors of one of its domestic corporations. And, according to the Court, while defendants receive many benefits of the legal fiction of a corporation, requiring "them in turn to shoulder one of the few burdens of such fiction" did not seem unfair.

The opinion is available in pdf.

Hospitality Partners, LLC v. Brewmasters Hotel, LLC (Mont. Co. Cir. Ct.)

Filed: September 12, 2011
Opinion by Judge Ronald B. Rubin

Held: A defendant cannot attempt to terminate a contract for cause under one termination provision and, upon failing to justify the termination and losing a jury trial, invoke a different termination provision (that it did not comply with) to argue that the plaintiff's "expectation interest" in the contract, and thus its claim for damages, must be limited.

Facts: A hotel management contract had multiple clauses providing for termination, including termination for "no cause" whereby the terminating party would owe only 6 month's notice. The defendant terminated the contract for cause, on the ground that the plaintiff was grossly negligent in performing. The plaintiff sued and won a $2.8 million damages verdict from a jury. The defendant moved for a new trial on the ground that, had it terminated the contract for no cause, it would have owed only six month's notice. The defendant argued that, because it could have terminated for no cause upon six month's notice, the plaintiff's expectation interest in the contract was limited to six month's worth of damages.

Analysis: The court held that the defendant was not entitled to invoke the "no cause" termination clause after attempting, and failing, to terminate the contract pursuant to a different clause. The court distinguished the case from other Maryland cases where a plaintiff's expectation interest was deemed limited to the amount of notice it was entitled to receive before termination of a contract: Cottman v. Maryland Dep't of Natural Res., 51 Md. App. 380 (1982) and Storetrax.com, Inc. v. Gurland, 168 Md. App. 50 (2006).

The court pointed out that the defendant had not invoked or attempted to comply with the requirements of the "no cause" provision. The contract was a complex set of interlocking promises and promised benefits. The parties clearly had the expectation that, absent good faith compliance with the express terms of the available termination provisions, the contract would last ten years. The defendant could have availed itself of the "easy out" of terminating for no cause if it had given notice and paid a small fee. Instead, the defendant chose another path and refused to give notice or pay the fee. After failing to justify its termination, the defendant was not entitled to invoke a different termination provision in order to cap its exposure to damages proven at trial.

The full opinion is available in .pdf.