Hovnanian Land v. Annapolis Towne Centre (Ct. of Appeals)

Filed: July 20, 2011
Opinion by Judge Sally D. Adkins

Held: A condition precedent may be waived by a party’s conduct despite a non-waiver clause found in a purchase agreement that requires waiver to be in writing.

Facts: Respondent is the owner and developer of a 33-acre, mixed-use development project. Respondent intended to sell parcels while retaining ownership over a few common parcels that were to be maintained through a collection of an annual Common Area Maintenance (“CAM”) fee from the owners of each parcel.

Respondent entered into a Purchase Agreement with Petitioner for the sale of two parcels where the Petitioner was planning on constructing three residential towers. The Purchase Agreement required the Respondent to establish CAM fees for the Petitioner’s parcels, and provide common area maintenance funding for the other parcels as conditions precedent to the Petitioner completing the purchase, which the Petitioner could enforce or waive. The Purchase Agreement also contained a non-waiver clause that required any waiver to be in writing.

Commencing on May 11, 2006 and continuing until January 2007, Respondent drafted a declaration and a proposed Supplemental Agreement between the parties to handle the CAM fees and the Petitioner had questions on each draft concerning them. Declarations were even recorded on October 30, 2006, December 20, 2006 and January 22, 2007. Prior to the recording of the January 2007 Declaration, Petitioner expressed concerns that there were some changes to the documents agreed upon by the parties that did not appear. Respondent notified Petitioner that it would address its concerns in a Supplement Agreement.

Over the next year, the project proceeded towards closing, and as they approached the original closing date, Petitioner paid $100,000 to extend that date, and soon afterward, Petitioner realized the extent to which the recent housing collapse had reached the markets. Petitioner sought an additional extension and/or a discount from Respondent and the parties could not agree on an acceptable extension deal and throughout these negotiations, Petitioner referenced market difficulties as the major reason for the requests.

On February 1, 2008, Petitioner’s president sent a letter to Respondent asserting that Respondent failed to fulfill the conditions precedent. On March 3, 2008, Respondent responded in a letter asserting that it satisfied the conditions because the Amended Declaration provided for annual assessments through the use of Supplemental Agreements.

Respondent filed a complaint in the Circuit Court seeking a declaratory judgment that Petitioner breached the Purchase Agreement. Petitioner answered, claiming that its obligations were relieved by Respondent’s failure to comply with the terms of the Purchase Agreement.

After both parties moved for summary judgment, the Circuit Court granted Respondent’s motion for summary judgment. Petitioner appealed to the Court of Special Appeals, and in an unreported opinion, the court affirmed the Circuit Court’s decision.

Petitioner then sought certiorari from this Court.

Analysis:

The threshold issue considered by the Court is whether a party can waive a contract right through its actions even if the contract contains a “non-waiver” clause. Relying on Freeman v. Stanbern Const. Co., 205 Md. 71, 106 A.2d 50 (1954), the Court held that oral modifications of a written contract may be established by the preponderance of the evidence even if a contract provides that the contract cannot be varied except through a written agreement by the parties.

The Petitioner argued that there is a distinction between “mutual” waiver and the waiver of a condition precedent. The Court held that there was no distinction and that case law does require mutual knowledge and acceptance, whether implicit or explicit, of the non-conforming action, and that in this case, the alleged waiver was “mutual” in that Respondent drafted and proposed the assertedly non-compliant declaration while Petitioner scrutinized it and provided substantial feedback. The Court added that a condition precedent usually benefits one of the two parties, and the benefited party’s actions will weigh more heavily in those cases.

Based on that analysis, the Court reviewed the Circuit Court’s grant of Respondent’s motion for summary judgment. The Circuit Court, apparently at the suggestion of the parties, resolved the issue on summary judgment, concluding as a matter of law that Hovnanian had waived the condition precedent. Yet, whether subsequent conduct of the parties amounts to a modification or waiver of their contract is generally a question of fact to be decided by the trier of fact. Further, nonwaiver clauses, although not favored by courts, must be considered by the trier of fact. Given the highly factual nature of the waiver inquiry, it is an uncommon case in which the issue can be resolved by summary judgment.

The Court then analyzed the Circuit Court’s decision to grant the Respondent its summary judgment motion. The Circuit Court held that as a matter of law, the Petitioner waived the condition precedent. Relying on University Nat’l Bank v. Wolf, 279 Md. 512 (1977), the Court held that analyzing the subsequent conduct to determine whether a waiver of a contract term has occurred is generally a question of fact to be decided by the trier of fact. In this case, a party must show the intent to waive both the contract provision at issues and the non-waiver clause.

Conclusion

Applying the foregoing rules, the Court reversed the granting of summary judgment and remanded the case to the lower court for the trier of fact to determine whether any party waived any rights.

The full opinion is available in pdf.

Uduak J. Ubom v. SunTrust Bank (Ct. of Special Appeals)

Filed: April 4, 2011
Opinion by Judge Kathryn Grill Graeff

Held: The clear language of an Agreement for a Line of Credit, as a whole, shows that the signature of a managing partner as guarantor was in a personal capacity, resulting in personal liability when the LLC defaulted on its obligations.

Facts: A professional limited liability company that provides legal services obtained a line of credit from a bank. The Managing Partner, the managing attorney and sole owner of the LLC, signed his name twice on the Agreement, once on the signature line for “Applicant” and once on the signature line for “Guarantor.” After both signatures, The Managing Partner included his title of “Managing Partner.” The Managing Partner also completed the personal information listed under the section title “Guarantor Information.” The Bank approved the line of credit.

Almost three years later, the bank filed a Complaint against the LLC and The Managing Partner asserting that the LLC had failed to make scheduled monthly payments due on the account, and requesting that the court grant judgment in its favor against the LLC and The Managing Partner, jointly and severally. The Managing Partner acknowledged that the LLC had defaulted on the Agreement, but argued that he signed the Agreement in his official capacity as Managing Partner, not as a personal guarantor of the loan. The Managing Partner further asserted that the bank representative told him that although he was signing as guarantor on the LLC’s Line of Credit, he could avoid personal liability by not including his name on the page of the Agreement that asked for legal name of guarantor, and by writing his title of “Managing Partner” after his signature on the final page of the Agreement.

The Circuit court granted summary judgment in favor of the bank and against the LLC and The Managing Partner. The Managing Partner appealed.

Analysis: The legal question before the court was whether The Managing Partner signed his name in his capacity as an officer of the corporation or whether it was a personal guaranty. The Court noted that The Managing Partner in arguing that his signature did not create a personal guaranty cited no case law in support of this assertion. However, the Court exercised its discretion to consider The Managing Partner’s claim. The Managing Partner argued that the court should have allowed him to introduce evidence of the statements allegedly made to him by SunTrust’s representative.

Maryland courts adhere to a principle of objective interpretation of contracts, and only when the language of the contract is ambiguous will the court look to extraneous sources for the contract’s meaning. The Court compared the contract in this case to a similar case, L & H Enterprises, Inc. v. Allied Building Prod. Corp, 88 Md. App. 642, where there was a question of whether a guaranty of a corporation’s obligation, signed by a corporate officer, was signed in the officer’s representative or individual capacity. Although the Court in that instance found there was no personal liability because there was intent to only bind the corporation and only one place the corporation’s representatives signed, the Court distinguished that case from the case at hand. Here, there were two signature lines, one for “Applicant,” the law firm, and one for “Guarantor.” The Managing Partner signed his name on both signature lines, including his title after his signature. The court asserted that a corporate officer is not relieved of personal liability by the mere addition of his corporate title to a signature line.

The Managing Partner also completed the personal information under the “Guarantor Information” section of the form. If The Managing Partner had only signed the guaranty in a representative capacity, this would render the guaranty inconsequential; it would add nothing to SunTrust’s security to have the law firm, through its Managing Partner, guaranty an obligation to which the law firm was already bound. The language of the Agreement specifically indentifies the applicant, the LLC, as the entity primarily responsible for the line of credit, and the individual signing as guarantor, as jointly liable for the obligation of the LLC.

Since the language, which is clear and unambiguous, of the Agreement as a whole shows an intent to fix personal liability, parol evidence is inadmissible to contradict the clear terms of the Agreement.

The Court held that the circuit court properly granted bank’s motion for summary judgment against the LLC and the Managing Partner.

The full opinion is available in pdf.

Bradshaw v. Hillco Receivables, LLC (Maryland U.S.D.C.)

Filed: February 23, 2011

Opinion by: Judge Richard D. Bennett

Held: A debt collector violates the Fair Debt Collection Practices Act (“FDCPA”) by violating State law for failing to register as a debt collector. In addition, the unlicensed filing of lawsuits to collect debts purchased from original creditors is violative of the FDCPA. Both questions are issues of first impression in this district and in the Fourth Circuit.

Facts: On June 17, 2009, the creditor (Defendant in the underlying case) filed suit against the debtor in the District Court of Maryland for Frederick County in order to collect a debt that it purchased from the debtor's original creditors after the debt went into default. The debtor then brought a separate class action against the creditor, asserting claims that the creditor acted as a debt collector in the State of Maryland without a license and that the creditor unlawfully filed lawsuits against the debtor and others as part of its debt collection practices. The debtor contends that the creditor, through its actions, violated the FDCPA, 15 U.S.C. § 1692 et seq., the Maryland Consumer Debt Collection Act (“MCDCA”), Md. Code Ann., Com. Law § 14-201 et seq., and the Maryland Consumer Protection Act (“MCPA”), Md. Code Ann., Com. Law § 13-101 et seq.

Analysis: The creditor acquired the debtor's delinquent account while it was in default, and the creditor is a person who engages directly or indirectly in the business of collecting such consumer claims. According to the Court, the creditor is therefore a "collection agency" within the meaning of the Maryland Collection Agency Licensing Act, Md. Code Ann., Bus. Reg. § 7-101, et seq. ("MCALA"). In the Court's view, the statutory scheme and its legislative history confirm that the statute is intended to cover not only agents of the original owners of consumer debts but also purchasers of such debt such as the creditor here. Debt purchasers who collect consumer claims through civil litigation are therefore subject to the licensing requirement. The Court found that the creditor violated this requirement when it failed to obtain a collection agency license prior to suing the debtor to collect a debt purchased from the debtor's original creditor. According to the Court, although the creditor's violation of MCALA's licensing requirement does not itself give rise to a private right of action, it may support a cause of action under the FDCPA. The Court specifically declined to hold that any violation of state law, no matter how trivial, constitutes a per se violation of the FDCPA. The FDCPA prohibits the use of any “false, deceptive, or misleading representation or means in connection with the collection of any debt,” 15 U.S.C. §1692e, and provides a non-exhaustive list of conduct that violates the FDCPA, including “[t]he threat to take any action that cannot legally be taken.” 15 U.S.C. § 1692e(5).

The creditor argued that it was not liable for violating the FDCPA because it did not threaten to take illegal action against the debtor but, rather, merely filed an illegal lawsuit against him. Although noting a split of authority among the circuits, the Court adopted the majority view, holding that the relevant section of the FDCPA prohibits the taking of “action that cannot legally be taken,” as well as the threatening of such action. Furthermore, under the "least sophisticated debtor" standard prevailing in the Fourth Circuit, the Court held that the filing of an illegal collection lawsuit would reasonably be construed by such a debtor as a threat to take illegal action.

The Court also held that the creditor was also not protected by the "bona fide error" defense, namely, that “the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.” 15 U.S.C. § 1692k(c). The Court held that this defense was not available to the creditor because of the Supreme Court's recent holding in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 130 S. Ct. 1605, 1608 (2010) that it does not apply to a violation resulting from a debt collector’s mistaken interpretation of the legal requirements of the FDCPA.

For essentially the same reasons as it found the creditor liable for violating the FDCPA, the Court also determined, on summary judgment, that the creditor had violated the MCDCA and the MCPA. Similar in purpose and scope to the FDCPA, the MCDCA states that a “person collecting or attempting to collect an alleged debt arising out of a consumer transaction” may not “[c]laim, attempt, or threaten to enforce a right with knowledge that the right does not exist.” Md. Code Ann., Com. Law §§ 14-201(b) & 14-202(8). The MCPA prohibits “unfair or deceptive trade practices,” Md. Code Ann., Com. Law § 13-301, and expressly designates as “unfair or deceptive trade practices” those that constitute any violation of the MCDCA. Each statute provides for a private right of action for its violation. The Court determined that because the creditor was not immunized from its conduct based on a mistake of law (i.e., that it was not required to be licensed under the MCALA), and because the creditor actually violated that law and was reckless as to whether its conduct was proscribed, the knowledge element of the MCDCA was satisfied. For the foregoing reasons, the Court ruled that the debtor was entitled to partial summary judgment, on liability only, on its claims for damages under the FDCPA, the MCDCA, and the MCPA (Counts II, III, and IV).

As a result of Judge Blake's recent opinion in Hauk v. LVNV Funding, LLC, __ F. Supp. 2d __, 2010 WL 4395395 (D. Md. Nov. 5, 2010), the Court held that declaratory and injunctive relief was not available to the debtor in the case at bar. The Court therefore found that the creditor was entitled to summary judgment on the debtor's Count I, which sought such relief.

Practice Tip: Judge Bennett specifically noted that the "FDCPA is a strict liability statute and a consumer has only to prove one violation in order to trigger liability." Consumer debt purchasers would therefore be wise to comply fully with this statute and its Maryland counterpart in order to avoid liability to consumers, including those, like the debtor in this case, who do not dispute the validity or amount of the underlying debt.

Related Opinion: In an earlier opinion granting the debtor's motion to strike the creditor's affirmative defenses, Judge Bennett held that the plausibility standard set forth in Bell Atlantic Corporation v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007) and Ashcroft v. Iqbal, 566 U.S.__, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009) applies to the pleading of affirmative defenses.

The full opinion is available in pdf..

The George Wasserman and Janice Wasserman Goldsten Family Limited Liability Company v. Kay (Ct. of Special Appeals)

Filed: February 9, 2011

Opinion by Judge James R. Eyler

Held: A claim brought by partners in a general partnership or members of an LLC against a managing partner or managing member will survive a motion to dismiss if they sufficiently allege they suffered harm directly and the managing partner or managing member violated duties owed to the partners or members.

Facts: Plaintiffs are partners in five real estate investment general partnerships and two real estate investment LLCs. Defendants are Mr. Kay, an individual that is the managing member or de facto managing member or partner of the partnerships and LLCs, and Kay Management Company, Inc. and Kay Investment Group, LLC, two entities controlled by Kay. Plaintiffs alleged Defendant took money from the partnerships and LLCs and invested the money with Kay Investment through Kay Management. In turn, Kay Investment invested the money with the Bernard Madoff entities. Plaintiffs brought suit following the Madoff ponzi scheme collapse.

The complaint set forth thirteen counts, including, among others, fraud, breach of fiduciary duties, conversion, civil conspiracy and negligence. The Circuit Court granted Defendant's motion to dismiss because none of the claims were individual, the derivative claims involving the partnerships were not agreed to by a majority of the partnership, and the failure to make demand on behalf of the LLCs was unexcused.

Analysis:

After a lengthy discussion of corporations, general partnerships and LLCs, the Court framed the principal issues on appeal as (1) whether Plaintiffs may assert individual claims against Kay and (2) whether Plaintiffs may bring derivative claims on behalf of the partnerships and LLCs against Kay.

(1) Individual Claims

Applying logic from Shenker v. Laureate Education, Inc., which permitted a shareholder to bring a direct action when the shareholder suffers the harm directly or duties owed to the shareholder have been violated, the Court extended the rationale to the law of partnerships and LLCs. The Court then concluded Plaintiffs sufficiently alleged (a) they suffered harm directly and (b) Kay violated duties owed directly to the Plaintiffs.

Plaintiffs alleged Kay took funds that were required to have been distributed. He also took funds required to be held in reserve, further injuring Plaintiffs by forcing them to replace the removed reserves.

Under the Revised Uniform Partnership Act, general partners owe each other, not just the partnership, fiduciary duties. Section 9A-405(b) of the RUPA "clearly provides a mechanism through which partners can sue other partners directly for breach of those obligations and others." However, there is no statute in Maryland expressly addressing LLC members' fiduciary duties. The Court, after finding managing members to be "agents for the LLC and each of the members, which is a fiduciary position under common law," again applied rationale from Shenker, to state where no statute precludes or limits fiduciary duties under common law, the underlying duties apply. Accordingly, the Court found Kay's fiduciary duties as the managing partner/member to run to the partnerships, the LLCs, the partners and the members.

(2) Derivative Claims

The Court found the term "derivative" inappropriate in a general partnership context. Derivative actions are necessary in a corporate and limited partnership context because shareholders and limited partners have no management rights. "Unlike shareholders and limited partners, however, general partners all have the ability to act on behalf of the partnership, and all have management rights." Accordingly, no need for a derivative action exists. The Court turned to whether minority general partners can bring claims against other partners. The Court cited many sections of RUPA to conclude all partners have equal ability to enforce rights involving partnership property. While section 9A-405(j) of RUPA requires unanimous consent of all the partners, the Court felt it should be tempered "when non-plaintiff partners have conflicts of interest." Instead, "the unanimity requirement should not apply to defendant partners and other interested partners."

However, based on the facts, the Court found a suit on behalf of the partnerships unnecessary because Plaintiffs adequately alleged an individual direct injury. If Plaintiff's prove the allegations, complete relief will be afforded. The derivative claims on behalf of the LLC were rejected for the same reason.

Note: In discussing fiduciary duties in the LLC context, the Court, citing section 4A-402(a) of the Maryland Limited Liability Company Act, notes that "one Maryland statute governing LLC operating agreements does suggest that provisions within operating agreements could alter existing duties or create other duties..." However, no such provisions were alleged in the case.

The full opinion is available in pdf.

Sherwood Brands, Inc. v. Great American Insurance Company (Ct. of Appeals)

Filed: February 24, 2011
Opinion by Judge Glenn T. Harrell, Jr.

Held: Pursuant to Maryland Code (1997, 2006 Repl. Vol.) Insurance Article Section 19-110, which provides that "an insurer may disclaim coverage on a liability insurance policy on the ground that the insured...has breached the policy...by not giving the insurer required notice only if the insurer establishes...that the lack of...notice has resulted in actual prejudice to the insurer," an insurer is required to demonstrate how it was prejudiced by late-bestowed notice so long as the claim against the insured arose before the expiration of the policy.

Facts: Sherwood (the "Insured") was issued a series of insurance policies by Great American Insurance Company (the "Insurer"). The most relevant policy (the "Policy") provided that Insurer would pay on behalf of Insured all "Claims" made against Insured during the Policy Period. Claims included civil proceedings made against Insured. The policy also provided that as a condition precedent to Insured's rights under the policy, Insured was required to provide written notice to Insurer of any Claim made against Insured during the policy period, including civil proceedings, as soon as practicable, but in no event later than ninety (90) days after the end of the Policy Period.

Two separate civil claims were filed and served on Insured within the Policy Period. However, in both cases, Insured failed to notify Insurer of the claims before ninety days after the expiration of the Policy Period. Insurer denied coverage of both claims stating that while both claims were covered by the policy, and that suits were filed against Insured within the Policy Period, Insurer did not receive notice of the suits until after the ninety-day notice requirement, and therefore was not obligated under the policy.

Insured filed a complaint and a motion for summary judgment in the Circuit Court alleging that Insurer breached the Policy by denying the claims. Insured also averred, regarding the claims, that Insurer was not prejudiced by any alleged delay in notification. Insurer denied any breach of the policies and asserted that coverage for the claims was barred due to Insured's failure to provide notice within 90 days after the end of the policy period. The Circuit Court agreed with Insurer's reasoning and granted its motion for summary judgment. Insured timely appealed to the Court of Special Appeals, and the Court of Appeals issued a writ of certiorari to consider "whether the lower court erred by ruling that Great American was not required by Section 19-110 of the Maryland Insurance Code to show actual prejudice in order to deny coverage based on the Sherwood's failure to comply with the notice condition of the [Policy] at issue."

Analysis: The Court engaged in a thorough historical review of relevant Maryland notice-prejudice legislation and case law to determine the status of the law today. The statute now governing notice-prejudice clauses in insurance policies is Maryland Code (1997, 2006 Repl. Vol.) Insurance Article Section 19-110. This statute provides:

An insurer may disclaim coverage on a liability insurance policy on the ground that the insured or a person claiming the benefits of the policy through the insured has breached the policy by failing to cooperate with the insurer or by not giving the insurer required notice only if the insurer establishes by a preponderance of the evidence that the lack of cooperation or notice has resulted in actual prejudice to the insurer.

Applying the text of Section 19-110, and the analyses and holdings from the cases reviewed by the Court, the court reached the following holdings:

First, the Court held that Section 19-110 does apply to claims-made policies in which the act triggering coverage occurs during the policy period, but the insured does not comply strictly with the policy's notice provisions. In this situation, Section 19-110 mandates that notice provisions be treated as covenants (rather than conditions precedent), such that failure to abide by them constitutes a breach of the policy sufficient for the statute to require the disclaiming insurer to prove prejudice.

Second, the Court held that Section 19-110 does not apply to claims-made policies in which the act triggering coverage does not occur until after the expiration of the liability policy, as this non-occurrence of the conditions precedent to coverage is not a "breach of the policy," as required by the statute.

The Court noted that its opinion may place Maryland jurisprudence at odds with the majority of other jurisdictions, but concluded that the text of, and the policies underlying Section 19-110, require the conclusions reached by the Court.

The full opinion is available in PDF.

In re Terra Industries, Inc. (Balt. City Cir. Ct.)

Filed: July 14, 2010
Opinion by Judge Evelyn Omega Cannon

Held: An exculpatory clause in a corporation's charter holding directors harmless from personal liability to the corporation or shareholders to the fullest extent of the law is enforceable, and it justified entry of summary judgment in favor of defendant directors. Section 1-102 of the Corporations and Associations Article is expansive and applies to every Maryland corporation and to all their corporate acts.

Facts: CF, a competitor of Terra, made numerous attempts to acquire Terra through unsolicited bids. Terra rejected those offers. CF bought Terra stock on the open market, which allowed it three seats on Terra's Board of Directors. Terra later told CF that it was not for sale and CF withdrew its offer to acquire Terra and announced it was no longer pursuing the acquisition. Unbeknownst to CF, Terra was entertaining other potential interests in its acquisition. CF later made another offer to acquire Terra which was accepted by the Board and the two companies merged.

Before the Terra/CF merger, four actions were filed, two of which were Maryland cases and consolidated into this action, alleging, among other things, that the individual defendants breached fiduciary duties by approving the Terra/CF merger. Terra's charter contained a provision which provides: "To the fullest extent permitted by statutory or decisional law . . . no director or officer of the Corporation shall be personally liable to the Corporation or its stockholders for money damages."

Analysis: The court found that the exculpatory clause was applicable, Plaintiffs had not pled facts of active and deliberate dishonesty, and the exculpatory clause may form the basis for granting a motion for summary judgment. Both section 2-405.2 of the Corporations and Associations Article and section 5-418 of the Courts and Judicial Proceedings Article of the Maryland Code allow the charter of a corporation to include any provision expanding or limiting the liability of its directors and officers. The court also found that actions taken in the sale or merger of a corporation are "corporate acts" as contemplated by section 1-102 of the Corporations and Associations Article and discussed in Shenker v. Laureate Education, Inc., 411 Md. 317 (2009).

The full opinion is available in pdf.

Pro-Football, Inc. v. Tupa (Ct. of Special Appeals)

Filed: February 28, 2011
Opinion by Judge Robert A. Zarnoch.

Held: Maryland courts will not enforce a forum selection clause that avoids application of Maryland’s workers’ compensation law.

Facts: Thomas Tupa, a former punter for the Washington Redskins, injured his lower back while warming up for a preseason game. Tupa filed a claim with the Maryland Workers’ Compensation Commission. After a hearing, the commissioner found that Maryland had jurisdiction over Tupa’s claim despite a forum selection clause to the contrary. The Maryland Circuit Court found, on appeal, that Maryland had jurisdiction as a matter of law. The issue was appealed to the Court of Special Appeals.

Analysis: The Court of Special Appeals affirmed the Circuit Court’s decision. Maryland’s Worker’s Compensation Act (the “Act”) provides that rights of employees under the Act cannot be waived. The court found that Maryland has a strong public policy in compensating employees for their injuries. Because the effect of the forum selection clause would be to avoid application of the Act, the court held that the forum selection clause contravened public policy.

The full opinion is available in pdf.