Penthouse 4C, LLC v. 100 Harborview Drive Council of Unit Owners (Cir. Ct. Balto. City)

Filed: June 5, 2012.

Opinion by Judge Evelyn Omega Cannon.

Held:   The Circuit Court for Baltimore City held that it had jurisdiction to confirm an arbitration award on a petition filed within 30 days after the arbitrators’ decision on a motion to modify the award, that the arbitrators did not exceed their jurisdiction in awarding the Plaintiff LLC the amount of costs of living and relocation expenses of the LLC’s sole member who was not a party to the arbitration, and that the award would not be vacated for manifest disregard of the law because the Defendant could not show that the arbitrators disregarded the law after understanding and correctly stating it. Finally, the Circuit Court refused to modify the specific performance part of the award based on Defendant’s evidence presented to the Court but not to the arbitrators.      

Facts: On March 9, 2010, the Plaintiff LLC, whose sole member was the primary resident of a condominium managed by the Defendant condominium council and directors, sued for specific performance and damages alleging that that the Defendant’s failure to perform required maintenance caused water exposure damage (mold) in the Plaintiff LLC’s condominium unit. The Plaintiff LLC’s sole member, an individual residing in the unit, was not individually named as a party to the suit.

The Circuit Court granted the Defendant’s motion to stay pending arbitration and after five days of hearings, on November 28, 2011 a majority of the three retired judges serving as arbitrators awarded the Plaintiff $1,252,487 in damages, including $433,722 for the sole member’s consequential costs, and ordered the Defendant to perform the required maintenance.

The Plaintiff filed a petition to confirm the award in the Circuit Court.   A day later the Defendant filed with the arbitrators a motion to modify the award as to what all agreed was an inadvertent mistake. On December 28, 2011 the majority panel issued its modification of the award, in part. On January 23, 2012 the Defendant filed in the Circuit Court a Petition to Vacate the Monetary Award and to Modify the Award’s order of specific performance.

Analysis:   The Circuit Court first addressed the Plaintiff’s claim that the Petition to Vacate was not timely filed. Relying on Mandl v. Bailey, 159 Md. App. 64 (2004),  the Circuit Court found that an arbitration award, although final and complete when issued, is rendered incomplete and no longer final when a motion is timely filed with the arbitrator to modify the award, therefore tolling the 30 day period in which a petition to vacate the award can be filed with the Court. In accordance with Mandl,  the Court found the Petition to Vacate was timely because filed within 30 days of delivery of the corrected award.

The Circuit Court next addressed whether the arbitrator panel exceeded its jurisdiction when making a $433,722 award to the Plaintiff LLC for consequential costs of the LLC’s sole member. The Court found that the Defendant participated in the arbitration without objection about jurisdiction or the appropriateness of a consequential costs award to the Plaintiff LLC’s sole member. The Circuit Court further found that the arbitration panel explicitly made the award to the Plaintiff LLC and not to the LLC’s sole member, therefore no jurisdictional issues were present.  

Next, the Circuit Court addressed the Defendant’s claim that the award for the consequential costs was “completely irrational” and a “manifest disregard of the law.” Although “manifest disregard of the law” is not stated as grounds to vacate an award in the Federal Arbitration Act or the Maryland Uniform Arbitration Act, the Court followed Sharp v. Downey, 197 Md. App. 123 cert. granted, 419 Md. 646 (2011) in applying the doctrine under principles of stare decisis. Reviewing authorities, the Circuit Court found that the “manifest disregard” standard requires some showing in the record, other than the obtained result, that the arbitrators knew the law and consciously disregarded it. The Circuit Court found that the Defendant never presented an issue to the arbitrators as to an award of the amount of the LLC’s sole member’s consequential costs and the arbitrators never provided any explanation for the award. In light of the Defendant’s silence, the award could not be “completely irrational” and the Defendant’s failure to refer the arbitrators to any law on consequential damages was fatal to the requirement of the “manifest disregard of the law” doctrine that the record show that the arbitrators were aware of the law and disregarded it.

Finally, the Defendant sought three modifications to the specific performance portion of the award: 1) incorporation of two Project Manuals that were not introduced into evidence, 2) allowing the Defendant to perform a peer-review of the Project Manuals, and 3) allowing value-engineering of the Project Manuals. Because the Project Manuals were not presented into evidence before the arbitrators, the Circuit Court could not conclude whether the proposed modifications would affect the award. Defendant also was silent during the arbitration hearing about peer-reviewing and value-engineering. Consequently, the Circuit Court denied the Defendant’s Petition to Vacate or Modify the Award and granted Plaintiff’s Petition to Confirm the Award.

The full opinion is available in PDF.

Hamot v. Telos Corp. (Cir. Ct. Balto. City)

Filed: May 21, 2012
Opinion by Judge W. Michel Pierson

Held: In an order denying motion for reconsideration, the Court held that Plaintiffs (directors of Defendant corporation) were not entitled to advancement of reimbursement of legal fees and expenses that Plaintiffs incurred in connection with their defense against a counterclaim filed by Defendants. The Court concluded that Plaintiffs could not affirm in good faith that the standard of conduct necessary of indemnification of legal expenses had been met. 

Facts: Plaintiffs were members of an LLC that owned preferred stock in the Defendant corporation.  Plaintiffs believed Defendant corporation wrongfully failed to pay dividends on the preferred stock.  Plaintiffs became members of the Board of Directors of Defendant corporation in hopes of changing accounting methods that calculate preferred dividend payment requirements.  Plaintiffs filed suit against Defendant corporation to require Defendant corporation to produce accounting documents and records necessary for Plaintiffs to perform their duties as directors. Plaintiffs also sent letters to the public accounting firm engaged to perform the annual audit of Defendant corporation's financial statements. The public accounting firm subsequently resigned from the audit citing a conflict of interest because members of the board of directors were not allowed to contact or influence the auditors.  Defendant corporation then filed a counterclaim against Plaintiffs for tortious interference with the contractual relations between Defendant corporation and its auditors and breach of fiduciary duty by Plaintiffs. 

Plaintiffs filed a motion seeking an order requiring Defendant corporation to advance reimbursement of legal fees and expenses that Plaintiffs incurred in connection with their defense against the counterclaim.  The motion was denied.  Plaintiffs then filed a motion for reconsideration. 

Analysis: Maryland law allows for the indemnification of legal expenses of officers and directors who are sued by reason of their service. Maryland law also allows for the advancement of legal fees pending the outcome of the final proceeding.  In order for a director to receive advancement of legal fees pending the final outcome, the director must: 1) make a written affirmation to the corporation of the director's good faith belief that the standard of conduct necessary for indemnification by the corporation has been met, and 2) provide the corporation a written undertaking by or on behalf of the director to repay the amount if it is ultimately determined that the standard of conduct has not been met. 

The standard of conduct required is set forth in Maryland statute section 2-418(b)(1), which provides that a corporation may indemnify a director unless it is established that the act or omission of the director was material to the matter giving rise to the proceeding, and was committed in bad faith, or was the result of active and deliberate dishonesty, or the director actually received an improper benefit in money, property, or services. 

The Court held that an affirmation of good faith is usually accepted as sufficient to show the directors believed their conduct met the standard, and that there should not be an overly intrusive examination into whether an affirmation was made in good faith.  However, the Court held that some review of the affirmation is permitted.  The Court ruled that the affirmation may be deemed invalid in situations where the record, objectively viewed, makes the maintenance of a good faith belief untenable.  Here the Court concluded that Plaintiffs were not entitled to an order of advancement because the facts on the record showed that Plaintiffs could not affirm in good faith that the standard of conduct necessary for indemnification of legal expenses had been met. 

The full opinion is available in PDF.
The denial of motion for reconsideration is available in PDF.

TIG Insurance Company v. Monongahela Power Company (Ct. of Special Appeals)

Filed: December 21, 2012

Opinion by Judge Shirley M. Watts

Held:  Pennsylvania law applies to the interpretation of insurance policies where the policies are delivered to and paid from a company’s office within that state.

Facts: Appellee, a Maryland corporation, is a holding company that purchased numerous insurance policies from various insurance companies (hereafter collectively referred to as “insurers”). Among these policies were four Excess Insurance policies issued by appellant, which provided indemnification of appellee for loss exceeding certain amounts. On each of these policies, appellee listed a New York address.

In 2001 and 2002, appellee demanded that the insurers indemnify it for costs related to the settlement of asbestos suits that triggered the policies and informed insurers to expect thousands of additional. Following these demands, one of the insurers filed a complaint against appellee and the other insurers requesting a declaratory judgment for the purpose of determining what obligations were owed under the policies. In 2010, appellee filed a motion for partial summary judgment requesting that the court find that Pennsylvania law apply to all policies made within a certain timeframe. It argued that the policies were “made” in Pennsylvania because the policies were accepted through payment of premiums by its insurance managers in that state.  Appellant joined in the arguments of another insurer, contending that New York law should apply due to appellee's headquarters there.  The trial court granted appellee’s motion for partial summary judgment.

Analysis: The court engaged in a thorough analysis of contract construction, explaining that insurance policies are contracts and under the doctrine of lex loci contractus, absent a contractual choice of law provision, a contract will be governed by the law of the state where the last act necessary to complete the contract occurs. For insurance policies, Maryland appellate courts have consistently held that this occurs in the state where “the policy is delivered and premiums are paid.” In this case, there was undisputed evidence that this occurred in Pennsylvania.  The record showed that: 1) appellee’s insurance department was located in Pennsylvania; 2) its insurance broker was also located in that state; 3) it was the general practice of appellee for insurance policies to be received by the insurance broker and forwarded to appellee’s Pennsylvania office; 4) it considered itself bound by a policy after the policy was received in its Pennsylvania office, at which point it would begin paying premiums; and 5) premium payments were made from its Pennsylvania office.

Appellant contended that New York law should apply because appellee was headquartered in New York, making it reasonable to conclude that the policies were delivered to that state. The court, however, noted that a company being headquartered in a state does not mean that all contracts into which the company enters are made in that state. Because appellant offered nothing to show that the policies were delivered to New York or that the premiums were paid from New York, the court affirmed the lower court’s grant of partial summary judgment and found that Pennsylvania law applies to the interpretation of the insurance policies.

The court went on to address a separate issue raised by appellant regarding whether, under Pennsylvania law, appellant is entitled to a set-off against the appellee’s loss which reflects the settling insurers’ proportionate shares of coverage for responsibility of the loss. 

The full opinion is available in  PDF.

Minnesota Lawyers Mut. Ins. Co. v. Baylor & Johnson, PLLC (Maryland U.S.D.C)

Filed: April 3, 2012
Opinion by Judge James K. Bredar

Held: In a declaratory action, the Court held that the Plaintiff was not liable to the Defendants under a professional liability insurance policy for defense and indemnification in a legal malpractice case.

Facts: The Plaintiff insurance company brought this declaratory action to determine its liability to the Defendant law firm in a legal malpractice case. In the underlying case, the Defendant failed to submit any affidavits, testimony or other sworn evidence in support of its Client’s opposition to summary judgment. The Client received a judgment against him, which was affirmed by the Maryland Court of Special Appeals on July 8, 2009. As soon as the Defendant read the Court of Special Appeals’ opinion, it contacted the Plaintiff to give notice that there may be a possible legal malpractice claim. The Client brought a legal malpractice claim against Defendant on August 11, 2009. The Plaintiff defended the Defendant until October 1, 2010, when it informed the Defendant that it would cease representation because the Defendant did not properly report the claim during the time when the firm “first became aware of the facts which could have reasonably supported the claim asserted against it by [Client].” The Defendant settled the case with the Client.

Analysis: The Court first construed the insurance policy language in light of the facts in this case. The insurance policy is a claims-made policy that covers all claims made during the policy period. The pertinent part of the policy states that “[a] CLAIM is deemed made when . . . (3) an act, error or omission by any INSURED occurs which has not resulted in a demand for DAMAGES but which an INSURED knows or reasonably should know, would support such a demand.” Under Maryland law, the Court uses an objective standard to determine if an insured has reasonable knowledge of the claim. Here, the Court found that that the malpractice claim happened when the Defendant submitted a faulty opposition to summary judgment motion and the Defendant should have known of the possible claim at this time because a reasonably lawyer barred in Maryland should know the standard for summary judgment motions. The Defendant had to inform the Plaintiff during the 2006 policy term, in order to be covered by the policy and it did not.

Second, the Court determined whether Md. Code Ann., Ins. § 19-110 (LexisNexis 2011) applies to this policy. This statute requires the insurance company to prove that it was actually prejudiced by the insured’s failure to give notice. Maryland Courts have interpreted § 19-110 to apply to insurance policies when the notice requirement is a covenant but not a condition precedent. See Sherwood Brands, Inc. v. Great Am. Ins. Co., 13 A.3d 1268 (Md. 2011) (interpreting the notice requirement as a covenant); T.H.E. Ins. Co. v. P.T.P. Inc., 628 A.2d 223 (Md. 1993) (interpreting the notice requirement as a condition precedent). If the notice requirement is a condition precedent, then a contract does not exist if the notice was not given and the insurance company has no obligation to the insured. The courts focus on the specific language of the policy to determine whether § 19-110 applies. Here, the Court found that the notice was a condition precedent and § 19-110 did not apply.

The full opinion is available in PDF.

CR-RSC Tower I, LLC v. RSC Tower I, LLC (Ct. of Appeals)

Filed: November 27, 2012
Opinion by Judge Sally D. Adkins

Held: Where two parties enter into a contract for the lease and development of real estate and one party subsequently breaches that contract, evidence of post-breach market conditions is not admissible to prove lost profits if the parties did not contemplate the market conditions when they contracted.

Facts: Landlord entered into two 90-year ground leases with Tenant, a "successful real estate company," related to a tract of land in Maryland, consisting of two adjoining properties. Under the ground leases, Tenant agreed to construct two apartment buildings that it would sell after construction and initial rental. After temporary modifications, the parties reverted to their original plan to build two apartments and arranged financing for the first building. However, as construction began, Landlord failed to provide estoppel certificates and, as a result, financing fell through. In November 2006, Tenant sued for breach of contract, seeking recovery of lost profits. 

Tenant based its claim on market projections as of December 2006, the time of the initial breach. Landlord contended that, because in 2006 the apartments weren't projected to be fully leased until 2010 and 2012, the actual market conditions in 2010 and 2012 were relevant. Landlord sought to show that under the conditions of the current market, Tenant would not have profited regardless of whether there was a breach. Landlord offered expert testimony about the real estate market crisis in 2008–2010, a time when “the world . . . changed” and “the cataclysmic events of 2008 in the economy” took place. 

The trial court ruled against Landlord on several motions, including, among other things, that Landlord could not introduce evidence of the 2008 crash in the real estate market to show that Tenant would not have made profits.

The jury found for Tenant, awarding it over 36 million dollars in collateral damages. Landlord appealed, alleging that the trial court erred in not admitting evidence of “post-breach market conditions.” It argued that such evidence is a necessary part of any lost profits claim and that, without it, a plaintiff cannot meet the requirement that lost profits be proved with “reasonable certainty.” 

The Court of Special Appeals affirmed the trial court’s decision, citing the “general principle” that contract damages are measured at the time of breach.

Analysis: The Court engaged in a lengthy discussion of measuring lost profits and reliance  damages. The Court determined that “consequential lost profits are calculated with reference to what the parties can reasonably be said to have anticipated when they entered into the contract.” The Court explained that, for this reason, “circumstances that cannot be said to have been ‘known to the parties’ when they contracted—such as a post-breach boom or bust in the market—should not affect the measure of consequential damages that would ‘ordinarily arise’ according to the ‘intrinsic nature of the contract.’” 

The Court explained, although many contracts are made with the possibility of future market downturns and, accordingly, allocate such risk between the parties, the contract in this case did not. Under this contract, the success of both parties depended on a relatively stable market and it could not be said that a subsequent, unforeseen, “cataclysmic”  market crash was within the parties’ contemplation.  Thus, the Court held that the trial court did not err in excluding evidence of post-breach market conditions.

The Court went on to discuss separate issues raised by Landlord regarding waiver of the attorney client privilege and joint and several liability.

The full opinion is available in PDF.

Dakrish, LLC T/A Vineyards Elite v. Ran Raich (Ct. of Special Appeals)

Filed: November 30, 2012.

Opinion by Judge Kathryn Grill Graeff.

Held: A party to a liquor board decision in circuit court has standing to appeal that court's decision to the Court of Special Appeals.  The review of a liquor board's decision by the Court of Special Appeals is limited to determining whether substantial evidence in the record as a whole supports the board's findings.  

 

Facts: The Baltimore County Liquor Board  ("Board") denied Applicant’s liquor license application. The Board reached their decison after hearing from several experts that presented conflicting testimony on the demand for the store, it's geographic location, proximity to other stores, and other factors.  The Applicant petitioned the Circuit Court for review, which reversed the Board's denial. The Circuit Court found “the Board’s decision was flawed because it failed to balance appropriate factors to be considered by the Board pursuant to Maryland Code (2011 Repl. Vol.) Art. 2B § 10-202(a)(2)(i), and gave undue weight to the potential for impact on existing licensees”  and remanded the case to the Board with instructions to issue a liquor license. 

 

Appellant, appearing at the Board hearing through one of its licensees in opposition to Applicant’s petition for a license, appealed to the Court of Special Appeals ("Court").  The Court addressed whether appellant had standing to bring suit and whether the Board had to consider all of the factors enumerated in the liquor licensing statute in reaching a decision to deny an application.

Analysis:  Applicant first argued Appellant lacked standing to seek judicial review of the Board’s decision as it was not an aggrieved party. The Court agreed that a person appealing to the circuit court must be aggrieved but found that appellant had the right to appeal pursuant to Md. Ann. Code art. 2B, § 16-101(f) as it was a party of record to the Circuit Court case.

The Court then addressed whether the Board was required to consider each of the enumerated factors of the liquor licensing statute.  Using United Steelworkers of America v. Bethlehem Steel Corporation, 298 Md. 665 (1984), Applicant contended that the Board here did not make adequate findings on the record with respect to each of the applicable factors to support its denial of the license application.  The Court noted the liquor licensing statute does not require that the Board set forth specific findings of fact and conclusions of law.  Instead, the Court stated its role is limited to "determining whether there is substantial evidence in the record as a whole to support the Board's conclusion."  The Court found such evidence to exist and supported the Board’s decision.

The full opinion is available in PDF.

Imperium Insurance Company v. Allied Insurance Brokers, Inc. (Maryland U.S.D.C.)

Filed: September 17, 2012
Opinion by Judge Catherine C. Blake

Held:  Venue in the District of Maryland is improper because a forum selection clause that required all actions to be brought in New York was reasonable and did not contravene the public policy interests of Maryland.

Facts:  Plaintiff, an insurance company, entered into an agreement with defendant, an insurance broker, in which defendant was to broker insurance policies and collect premiums on behalf of plaintiff.  Plaintiff filed suit in the United States District Court for the District of Maryland for breach of contract and other claims.  Defendant filed a motion to dismiss for improper venue based on Rule 12(b)(3) and citing the forum selection clause in the agreement which required that all actions be litigated exclusively in the state and federal courts of the County of New York, State of New York.

At the time the agreement was entered into, New York was plaintiff's principal place of business, but the company had since moved its state of incorporation and principal place of business to Texas.  Defendant resided and worked exclusively in Maryland.  The agreement had been amended four times reaffirming the forum selection clause and defendant had continuously transacted business with plaintiff at its New York location during this period.

Analysis:  The Fourth Circuit recently clarified that forum selection clauses are procedural matters governed by federal law.  Albemarle Corp. v. AstraZeneca UK Ltd., 628 F.3d 643 (4th Cir. 2010).  Absent a clear showing that a forum selection clause is unreasonable, the contractually selected venue should be enforced.  A forum selection clause will be found unreasonable only if: (1) it was induced by fraud or over-reaching, (2) the complaining party will be deprived of its day in court because of the grave inconvenience or unfairness of the selected forum, (3) the fundamental unfairness of the chosen law may deprive the plaintiff of a remedy, or (4) enforcement would contravene a strong public policy of the forum state.

Plaintiff did not argue that the clause was unreasonable.  Since plaintiff was responsible for the clause's inclusion in the agreement, its formation was not induced by fraud, nor would there be "fundamental unfairness" by subjecting plaintiff to New York law.  Furthermore, the court declared that enforcement of the clause would not contravene the public policy interests of Maryland because Maryland has adopted the federal standard for the enforceability of forum selection clauses.  see Gilman v. Wheat, First Securities, Inc., 692 A.2d 454 (Md. 1997).

The court found that the only evidence plaintiff provided that would suggest that enforcement of the clause would be unreasonable was that plaintiff had moved its principal place of business from New York to Texas and that defendant's only connection with New York was through its agreement with plaintiff.  Therefore, plaintiff argued, Maryland would be a more convenient forum for defendant.  The court rejected this argument because in order to invalidate a forum selection clause for inconvenience, the complaining party must show hardship.  Here, defendant sought to litigate in New York, even though Maryland arguably would be a more convenient forum.  On the other hand, both Maryland and New York are far from plaintiff's home district in Texas; therefore, the cost of having to litigate in New York instead of Maryland will not be gravely inconvenient.  The court concluded that a transfer to the contracted forum would be unlikely to result in plaintiff being unable to have its day in court.

Plaintiff also argued that the forum selection clause should not be enforced because it was included in the agreement solely for the benefit of plaintiff and that by filing suit in the District of Maryland, plaintiff waived its rights under the clause.  The court rejected this argument as well, stating that the clause, as drafted, applied to both parties and was mutually beneficial.  The court held that venue in the District of Maryland was improper and ordered transfer to the Southern District of New York.

The full opinion is available in pdf.