Boland v. Boland; Boland v. Boland Trane Associates, Inc. (Ct. of Appeals)

Filed: October 25, 2011
Opinion by Judge Sally D. Adkins.

Held:

Holding 1: After a motion to dismiss or for summary judgment against a derivative plaintiff, Maryland courts must review a special litigation committee's ("SLC") independence, and whether it made a reasonable investigation and principled, factually-based conclusions. In this inquiry, the SLC is not entitled to a presumption that it was sufficiently independent from a corporation's directors.

Holding 2: When a court grants summary judgment in a derivative suit based on an SLC's determination that continuing the lawsuit is not in the corporation’s best interest, that court decision is not a final adjudication on the merits so as to preclude a direct suit under the doctrine of res judicata. The court makes no determination of the merits of the allegations when reviewing an SLC's decision. Moreover, a direct action, which asserts individual rights, is an entirely different cause of action than a derivative action, which is brought on behalf of the corporation.

Facts: Two lawsuits arose when a family business, consisting of two corporations and owned primarily by eight siblings (collectively, the "Corporation"), attempted to repurchase the stock of one sister upon her death pursuant to a Stock Purchase Agreement. When the sister's estate refused to sell the stock, the Corporation filed a declaratory judgment action seeking enforcement of the Stock Purchase Agreement. Meanwhile, non-director siblings who had learned of earlier stock transactions that resulted in director siblings acquiring additional corporate stock for themselves, sent a demand for litigation to the Corporation and filed a derivative action in the Circuit Court alleging self-dealing and a breach of fiduciary duty. They also filed "direct" claims, as cross-claims in the declaratory judgment action.

In response, the corporations appointed an SLC consisting of two newly hired "independent directors" to examine the claims. The SLC determined that the stock transactions were legitimate and the Stock Purchase Agreement was enforceable.

The Circuit Court, applying the business judgment rule, deferred to the judgment of the SLC and granted summary judgment to the Corporation on the derivative action. The Circuit Court also dismissed the cross-claims relying on res judicata.

Analysis: On appeal in the Court of Appeals, the Court upheld the application of the business judgment rule by the Circuit Court and held that after a motion to dismiss or for summary judgment against a derivative plaintiff, Maryland courts must review the SLC’s independence, and whether it made a reasonable investigation and principled, factually-based conclusions. However, in this inquiry, the SLC is not entitled to a presumption that it was sufficiently independent from the directors. Because the Circuit Court presumed the independence and good faith of the SLC without requiring that the Corporation prove the SLC's independence, the Court of Appeals vacated the Circuit Court's judgment and remanded for further proceedings.

The Court referred to its holding as an "Auerbach enhanced" standard, in reference to Auerbach v. Bennett, 393 N.E.2d 994 (N.Y. 1979). In so holding, the Court rejected the so-called Zapata standard under which Delaware courts review a SLC’s recommendation on the merits, applying their “independent business judgment.”

The Court reasoned that "a procedural review under the business judgment rule, although clearly the more deferential standard [toward the Corporation], nonetheless provides for a thorough review of an SLC’s independence, good faith, and methodology, and such inquiry gives trial courts the ability to scrutinize SLC decisions and protect shareholders against collusive practices or inadequate investigations."

On the issue of whether the non-director siblings' "direct" claims, brought as cross-claims in the declaratory judgment action were precluded by res judicata, the Court held that the Circuit Court's grant of summary judgment in the derivative action, based on a recommendation of the SLC, does not form a basis for res judicata because it is not a determination on the merits. Accordingly, the Court held that a trial court's resolution of a derivative complaint, when based on the recommendation of an SLC, cannot be said to be a final judicial resolution on the merits of the claims.

The full opinion is available in PDF.

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.

Cloverleaf Enterprises, Inc. v. Maryland Thoroughbred, Horsemen's Association, Inc. (Maryland U.S.D.C.)

Filed: August 25, 2010

Opinion by Judge Richard D. Bennett.

This is a companion opinion to the opinion, the summary of which was posted on August 16, 2010.

Held: (1) Allegations that the defendants conspired to orchestrate an illegal boycott require more proof to survive summary judgment than e-mails informing defendants that other parties to a consent agreement were withdrawing their consent.

(2) Contract provisions that provide that the contract can be terminated if certain governmental approvals or consents are not "private rights of action" to enforce provisions of legislative enactments, but are, instead, contractual provisions.

Facts: Cloverleaf Enterprises, Inc. owns a racetrack in Maryland that accepts horse racing wagers on live simulcast signals provided by other racetracks. The signals come from both Maryland and out-of-state racetracks. As required under federal and Maryland law, Cloverleaf obtained the consent of other Maryland racetracks and certain other groups before receiving the simulcast signals. The consent was in the form of a Cross-Breed Agreement, pursuant to which Cloverleaf paid weekly fees in return for the right to accept wagers on the simulcast races. Cloverleaf and TrackNet Media Group, LLC entered into a Simulcast Agreement, pursuant to which TrackNet agreed to simulcast horseracing content from certain other racetracks.

Cloverleaf breached the Cross-Breed Agreement by failing to pay the required weekly fees. As a result, the other Maryland racetracks withdrew their consent to Cloverleaf receiving the simulcast signals of their own races and out-of-state races. Following the withdrawal of consent, TrackNet informed Cloverleaf it could no longer distribute the horseracing content under the Simulcast Agreement.

Cloverleaf filed a complaint against TrackNet and Churchill Downs Incorporated alleging breach of contract. (Additional claims brought by Cloverleaf are discussed in the posting of August 16, 2010.) Defendants moved for summary judgment.

Cloverleaf contended summary judgment should be denied for three reasons: 1. the Maryland Jockey Club did not have the right under law to withdraw consent; 2. the Simulcast Agreement required approval to be withdrawn from a government entity for termination; and 3. the defendants participated in an illegal group boycott.

Analysis: The court applied Kentucky law to find the Simulcast Agreement was not breached. The agreement was free of ambiguity and "automatically terminated . . . upon the failure to obtain or withdrawal of any approvals required by any applicable laws . . . ." Thus, the agreement terminated when consent was withdrawn.

The court disagreed with all of plaintiff's arguments against summary judgment. First, the legality of the withdrawal of consent is irrelevant because the Simulcast Agreement did not require the defendants to assess the validity of the withdrawal. Second, the use of different words in the Simulcast Agreement, such as "approvals," "consents," and "requirements," did not convey different authorizations as the agreement stated termination can occur upon the "withdrawal of any approvals." Third, as a "party cannot create a genuine dispute of material fact through mere speculation or compilation of inferences," e-mails sent to defendants informing them of the withdrawal of consent lacked sufficient proof of an illegal group boycott to withstand summary judgment.

The full opinion is available in pdf.

TEKsystems, Inc. v. Bolton (Maryland U.S.D.C.)

Filed: February 4, 2010
Opinion by Judge Richard D. Bennett

Held: A covenant not to compete is enforceable even where the competing former employee does not solicit his former employer's clients or use its confidential information if the scope of the restrictive covenant is limited to reasonable temporal and geographical limits, the employer is protecting legitimate business interests with the covenant, the employee has unique and specialized skills, there is no undue hardship on the employee to comply with the restriction and the public interest is served by enforcing the restrictive covenant; and the court held that it would extend the duration of the restrictive covenant for so long as the employee was in breach of it.

Facts: In 1999, the Defendant signed an employment agreement with Plaintiff, containing (among other provisions) a covenant not to compete against Plaintiff for 18 months after his employment terminated and within a 50-mile radius of his former office. Substantively, the covenant prohibited Defendant from engaging “in the business of recruiting or providing on a temporary or permanent basis technical service personnel, industrial personnel, or office support personnel” within these temporal and geographic limitations.

A separate covenant also prohibited Defendant from soliciting or competing for any persons or entities who were clients or customers of Plaintiff within the two years prior to the termination of the Defendant's employment. In 2008, the Defendant resigned from his employment with Plaintiff and, immediately thereafter, accepted a similar position in the IT-staffing business with one of Plaintiff's competitors and within the temporal and geographic limits of the covenant not to compete. None of the IT-staffing placements Defendant made for his new employer (Plaintiff's competitor) involved solicitation of or competition for Plaintiff's clients or customers. Plaintiff admitted at deposition that it was unaware of any such solicitation by Defendant.

Analysis: Under Maryland law, covenants not to compete may be enforced only against those employee who provide unique services or to prevent the future misuse of trade secrets, routes or lists of clients or solicitation of customers. Such covenants will be enforced if the restraint is confined within limits which are no wider as to area and duration than are reasonable for the protection of the business and do not impose undue hardship on the employee or disregard the interests of the public.

In reaching its decision, the court analyzed and concluded on the following:

(1) the 18-month temporal and 50 mile geographic scope of the covenant is facially reasonable and comports with similar limitation upheld by Maryland courts;

(2) the Plaintiff was protecting its legitimate business interests by enforcing the covenant because the employee was critical to the growth in revenue for the region, was key to building the personal relationships with clients in the area as required for the staffing industry, and had access to high level client contacts and confidential information;

(3) the employee at issue possessed unique and specialized skills because of his training and success in the banking industry in New York and had the most knowledge of each customer in the area;

(4) the employee would not suffer undue hardship by enforcing a covenant with the temporal and geographical restraints in this case because the employee was able to conduct business everywhere else in the world except for the area within 50 miles of New York City; and

(5) the public interest is protected by enforcing reasonable restrictive covenants against former employees of high technology and high-growth business.

In reaching its decision with respect to each factor, the court relied on Becker v. Bailey, 268 MD. 93, 299 A.2d 835 (1973); Ruhl v. F.A. Bartlett Tree Expert Co., 245 Md. 118, 225 A.2d 288 (1967); TEKsystems, Inc. v. Spotswood, 05-CV-1532-RDB, Memorandum Opinion (D. Md. June 28 2005); Intelus Corp. v. Barton, 7 F. Supp. 2d 635 (D. Md. 1998) and PADCO Advisors, Inc. v. Omdahl, 179 F. Supp. 2d 600 (D. Md. 2002).

The court granted summary judgment for Plaintiff, finding that Defendant breached the covenant by competing against Plaintiff in the IT-staffing business within the agreed temporal and geographic limits. The Plaintiff, however, would not be awarded monetary relief exceeding nominal damages because there was no proof that the Defendant solicited Plaintiff's customers or clients.

Injunctive relief against future violations of the covenant was warranted. The court held that the Plaintiff was entitled to an equitable extension of the entire 18-month period, running from the date of the court's opinion, because Defendant began violating the non-compete provision almost immediately after the termination of his employment with Plaintiff.

Practice Pointer: Plaintiff's affidavit, alleging that Defendant did, in fact, solicit Plaintiff's clients while working for his new employer, would not be considered on summary judgment. The affidavit contradicted Plaintiff's prior deposition testimony, and there was no showing that the facts asserted in the affidavit were unknown or inaccessible at the time of the deposition. Given this ruling, litigators are cautioned to prepare a Rule 30(b)(6) witness thoroughly. A party may not, on summary judgment, contradict its own Rule 30(b)(6) deposition testimony with evidence that was reasonably accessible at the time of the deposition.

The full opinion is available in PDF.