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.

Serio v. Baystate Properties, LLC (Ct. of Special Appeals)

Filed: March 8, 2012

Opinion by Retired Judge James A. Kenney, III

Held: Absent a finding of fraud, the circuit court erred by finding defendant personally liable for the debts of the limited liability company solely owned by him.

Facts: The plaintiff, a home builder, entered into a contract with defendant, as managing member of an LLC, to build houses to certain specifications on two lots lots which were owned by the defendant individually. As work progressed, the plaintiff drafted multiple addenda to the Agreement reflecting changes to the work. Each addendum, when first presented by the plaintiff, referenced the defendant individually, but the defendant revised those references and both parties signed the addenda, with the defendant signing as Managing Member of LLC. Both parties executed a waiver of any claims for personal liability under this agreement.

Shortly thereafter, payments to the plaintiff slowed. When the plaintiff contacted the defendant regarding the payments, the defendant assured that the properties would soon be sold. Although both properties had been sold, the buyers subsequently defaulted on a mortgage and the defendant received only a small portion of the sale. According to the plaintiff, none of the proceeds from the sale of the lots were deposited in the defendant's business account. 

The plaintiff sued, and the defendant LLC filed for bankruptcy protection. After a bench trial, the circuit court deemed it necessary to pierce the corporate veil to enforce a paramount equity. Accordingly, it entered a verdict against the individual defendant. The defendant appealed.

Analysis: On appeal, the Court affirmed that "except as otherwise provided [in this title], no member shall be personally liable for the obligations of a limited liability company, whether arising in contract, tort or otherwise, solely by reason of being a member of the limited liability company." The Court noted, however, that the corporate shield may be disregarded under certain circumstances. Specifically, "shareholders generally are not held individually liable for debts or obligations or a corporation except where it is necessary to prevent fraud or enforce a paramount equity." Bart Arconti & Sons, Inc. v. Ames-Ennis, Inc. 275 Md. 295 (1975).

The Court qualified this by stating the standard is so narrowly construed, that no appellate court finds an "equitable interest more important than the state's interest in limited shareholder liability." Residential Warranty v. Bancroft Homes Greenspring Valley, Inc., 126 Md. App. 294 (1999). Further, there is no precedent in the court's history of approving this extraordinary remedy of paramount equity. Even Maryland decisions that recognize alternate grounds for piercing the corporate veil do not do so absent a finding of fraud.

The Court compared this case to Hildreth v. Tidewater, where the trial court found circumstances establishing paramount equity that would warrant disregarding the entity shield based on the fact that defendant was the sole shareholder, personally involved in the transaction at issue, there was evidence of bad faith, the business conducted by the corporation was illegal because it was not registered in Maryland, Maryland law precluded an unregistered foreign corporation from engaging in business in Maryland, and there was evidence of a conscious evasion of responsibility. 378 Md. 724 (2006). The Court of Appeals, however, reversed, holding that those circumstances, individually or in combination did not warrant piercing the corporate veil. Id. at 734.

In discussing one possible ground where a corporate entity will be disregarded, the Court discussed the "alter ego" doctrine, and found it would only apply in exceptional circumstances and with great caution where a plaintiff shows "(1) complete domination, not only of the finances, but of the policy and business practice...(2) such contract was used by the defendant to commit fraud or wrong.. and (3) that such control and breach of duty proximately caused injury or unjust loss." Id. at 735. Further factors include whether the corporation was adequately capitalized, the company's solvency when entering the transaction, the observance of corporate formalities, and evidence that the corporation "has no separate mind, will or existence of its own." Id. at 736. The Court also touched upon the theory of whether the conduct was for the purpose of evading legal obligation, but found that the court's narrow interpretation of this ground did not warrant the defendant being held personally liable. The court found, moreover, the decisions of this Court and the Court of Appeals have made clear that the corporate veil will not be pierced to redress the breach of a contractual obligation in the absence of fraud when the party seeking to pierce the corporate shield has dealt with that corporation in the course of its business on a corporate basis. In sum, Maryland is averse to disregarding the entity shield in a business situation in the absence of fraud. 

Here, the circuit court did not find fraud, but found circumstances that warranted paramount equity. The circuit court viewed the defendant's failure to deposit the funds from the sale of the lots into the defendant's bank account and the fact that the defendant later filed for Chapter 7 bankruptcy as evidence of an intent to evade the company's legal obligations to the plaintiff. When reviewing these circumstances, this Court saw a greater parallel to Bart Arconti where the Court refused to pierce the corporate veil and hold a shareholder personally liable for conduct that rendered its corporation all but insolvent and was "clearly designed to cause the corporation to evade a legal obligation." 275 Md. at 305. This Court also refused to pierce the corporate veil in a situation where a shareholder placed corporate funds into his personal account and lied regarding matters affecting public safety. See Bancroft, 126 Md. App. 294.

The Court concluded that the defendant fulfilled the contract with the plaintiff until, as the defendant testified, the collapse of the housing market caused problems. The plaintiff was an established building contractor who understood and agreed that it was doing business with another limited liability company, as reflected in the Agreement, and their continuing court of business. Under those conclusions, the Court found that the circuit court abused its discretion in finding the defendant personally liable for the obligations of the defendant.

The full opinion is available in pdf.

Maryland Limited Liability Company Revision Act of 2011

The Maryland State Bar Association Business Law Section Committee on Unincorporated Business Associations has drafted a proposed set of revisions to the Maryland Limited Liability Company Act. The proposed revisions can be found here and the report of the drafting committee can be found here.

The proposed revisions have been approved by the Section Council of the MSBA Business Law Section. Needless to say, the proposed revisions are subject to amendment and modification at each step of the process, including modification before the bill is formally submitted to the General Assembly.