Consortium Atlantic Realty Trust, Inc. v. Plumbers & Pipefitters National Pension Fund, et al. (Cir. Ct. Mont. Co.)

Filed:  February 5, 2013
Opinion by Judge Ronald B. Rubin

Held:  A board of directors is not subject to Revlon duties when shareholders choose to exercise their put rights under a shareholders agreement.

Facts:  Plaintiff, a Maryland corporation, sued Defendants, union pension funds who owned approximately 93% of the stock in Plaintiff, for breach of a shareholders’ agreement entered into between Plaintiff and Defendants.  Under the shareholders’ agreement, each Defendant was granted the unilateral right to withdraw as a shareholder six years after the effective date of the agreement. Defendants gave proper notice of the exercise of their withdrawal right under the shareholders’ agreement, but the parties disputed the valuation of Defendants’ shares under the withdrawal right. The pertinent section of the shareholders’ agreement required Plaintiff to redeem all of the shares held by a withdrawing shareholder at fair market value. Plaintiff set the fair market value of Defendants' shares at $7.93 per share, the price set forth in an appraisal of one share of stock done two years earlier.  Defendants refused to accept any “discounted” value for their shares, insisting on redemption at $10.00 per share, the price initially paid by Defendants for each share.

Plaintiff filed suit for breach of the shareholders’ agreement. Defendants filed a counterclaim raising a number of claims regarding the shareholders’ agreement and its interpretation, the most pertinent of which was Plaintiff’s failure to maximize shareholder value. Plaintiff moved to dismiss the counterclaim.

Analysis:  Defendants alleged a breach of fiduciary by Plaintiff and certain of its directors by failing to sell the company before Defendants exercised their withdrawal rights so that the directors could obtain a “windfall” when Defendants redeemed their shares for a discounted value. Defendants also contended that the exercise of their withdrawal rights, which collectively amounted to 93% of Plaintiff’s shares, constituted a change-in-control transaction under Maryland law. In short, the court stated that Defendants were attempting to impose Revlon duties, as applied to Maryland law in Shenker v. Laureate Education, on Plaintiff and its directors.

The court agreed that Shenker is limited, until the Court of Appeals says otherwise, to a cash-out merger when the decision to sell the corporation is already made, and dismissed Defendants’ claims. Here, it was the shareholders, not the board of directors, who made the decision to “sell”, i.e., to exercise their put rights under the shareholders’ agreement. Much like a tender offer situation, the decision to be made, withdraw as, or remain a shareholder does not implicate the duties or functions of the board of directors. Revlon duties were inapplicable because the board had nothing to do with the decision to “sell.”

The court also rejected Defendants’ change of control argument, stating that shareholders cannot unilaterally “create” a change of control implicating Revlon solely by virture of their own decisions. Revlon duties are premised upon action taken by the board, which results in a change from managing the company to selling the company. Plaintiff’s board made no decision to sell, merge or otherwise re-organize the business of the company.  Shareholders cannot impose additional duties on a board solely by reason of their own economic decisions to involve provisions of a shareholders’ agreement.


The full opinion is available in pdf.

Ohio Learning Centers, LLC v. Sylvan Learning, Inc. (Maryland U.S.D.C.)

Filed July 24, 2012

Opinion by Judge Richard D. Bennett

Held:  (1) A forfeited corporation may defend against a lawsuit and file counterclaims arising out of the same subject matter as the underlying suit.  (2) Courts employ a totality of the circumstances approach in reviewing a jury trial waiver provision, including factors such as the parties' bargaining power, the conspicuousness of the waiver provision and whether the provision is comprehensible.
 

Facts:  Plaintiffs and Defendants entered into an asset purchase agreement, a license agreement and two promissory notes pursuant to which Plaintiffs would purchase and operate a  franchise.   The license agreement also contained a non-compete clause.  Shortly thereafter, Plaintiffs were unable to make payments on the promissory notes.  Defendants sent two notices of default and intent to terminate license agreement to the Plaintiffs. 

The Court ordered Plaintiffs to "not use any or all of the trademarks, service marks, or trade names associated" with the Defendants.  The Court also held that the agreements were valid and enforceable and that Plaintiff breached those agreements.  The Court withheld ruling on any damages in order to adjudicate the remaining claims, set forth below. 
 

Analysis:  Plaintiffs argued that because two of the Defendants had forfeited their charters for failing to file personal property tax returns with the State Department of Assessments and Taxation, the defendants were prohibited from maintaining or defending any lawsuit in the state.  The Court disagreed and stated that “it is well established in Maryland that a forfeited corporation may defend against a lawsuit and file counterclaims arising out of the same subject matter as the underlying suit.”  Finch v. Hughes Aircraft Co., 57 Md. App. 190 (1984) and Price v. Upper Chesapeake Health Ventures, 192 Md. App. 695 (2010) ("an LLC whose rights have been forfeited...may only defend an action in court, not prosecute one"). 

Defendants moved to strike Plaintiffs' demand for a jury trial because the promissory notes and the asset purchase agreement contained a jury trial waiver.  The Court agreed that three of the four agreements at issue contained jury waiver clauses.  But, the Court highlighted that the main contract governing the claims in litigation did not.  The Court employed a totality of the circumstances approach.  It denied the motion after review of the superior bargaining power of the Defendants, the integrations clause in the license agreement and the inconspicuous location of the waiver clause in the promissory notes and the asset purchase agreement.   

Defendants' also moved to dismiss with respect to several fraud claims, including claims involving Maryland Franchise Registration and Disclosure Law.  The Court stated "a plaintiff can successfully bring a tort action for fraud that is based on false pre-contract promises by the defendant even if (1) the written contract contains an integration clause and even if (2) the pre-contractual promises that constitute fraud are not mentioned in the written contract."  Next Generation Group, LLC v. Sylvan Learning Ctrs, LLC, No. CCB-110986 (2012).  Because the materiality of any alleged omissions are factual questions inappropriate for determination at the motion to dismiss stage, the Court denied the motion.

The Court briefly reviewed other claims, including tortious breach of good faith, unfair competition, defamation, tortious interference in contractual relations, deceptive trade practices and antitrust conspiracy.

The full opinion is available in pdf. 

In re American Realty Capital Trust (Cir. Ct. Balto. City)

Filed: December 13, 2012

Opinion by Judge Audrey J.S. Carrion 

Held:  The Court entered an order staying discovery pending resolution of motions to dismiss because the requesting party failed to show it would otherwise suffer harm or that it was needed to resolve the issues before the court. 

Facts:  Two companies announced a merger and shareholders sued. The Defendants filed dispositive motions and a joint motion to stay discovery pending resolution of the dispositive motions. The Defendants argued that, if the dispositive motions were granted, they would dispose of the case in its entirety. The Plaintiffs moved to compel discovery.

Analysis:  The Court concluded that the Plaintiffs failed to meet the burden of showing that they would suffer harm if they were not granted discovery. Relying upon its broad discretion to manage discovery, the Court granted the motion to stay.

The full opinion is available in .pdf.

Host International, Inc. v. Maryland Transportation Authority (Cir. Ct. Balto. City)

Filed: November 5, 2012

Opinion by Judge Audrey J.S. Carrion

Held:  (1) The majority of Plaintiff’s claims failed because the disputed government contract was not “procurement” as defined by applicable statutes, regulations, and the Request for Proposal; (2) although the winning bid was not approved by one of three legislative committees before being awarded as required by statute, the court declined to void the contract for public policy reasons. 

Facts:  Plaintiff sued the Maryland Transportation Authority (“MTA”) and various administrative agency leaders, alleging that a public-private agreement to develop and operate two travel plazas was awarded improperly.  Plaintiff argued that the MTA’s award of the Interstate 95 Travel Plaza Redevelopment Public Private Partnership Lease and Concession Agreement (“I-95 P3”) was illegal under applicable procurement laws and regulations.  Plaintiff sought a declaratory judgment that the award of the I-95 P3 was null and void and imposing procedural requirements for a re-bidding process.  The MTA moved to dismiss.  After a thorough examination of the statutory, regulatory, and administrative law concepts controlling the dispute, the Circuit Court for Baltimore City dismissed Plaintiff’s complaint in its entirety with prejudice. 

Analysis: The I-95 P3 and other public-private partnerships like it are being used increasingly by state and local governments to develop infrastructure with less funding by “delegate[ing] project risks and construction management to private parties[.]”  With those goals in mind, the MTA sought a party to lease two travel plazas and “to enter into a concession agreement for thirty-five years, during which time the private-sector partner would be fully responsible for redeveloping and then maintaining and operating these travel plazas.”  The court noted that the contract was estimated to be worth approximately $400 million. 

          The court determined that the procurement laws and regulations at issue did not apply to MTA’s proposal and award of the I-95 P3.  Under those laws, a “procurement occurs where the State buys or temporarily obtains, as lessee, goods or services.”  Md. Code Ann., Transp. Art. §§ 11-101(m)(1)(i)-(ii).  Further, MTA regulations exclude “from procurement the occurrence when the State of Maryland leases its own property.”  COMAR 21.01.03.03(B)(1)(d) (2012).  Last, the court noted that the Request for Proposal, “which Plaintiff agreed to abide by in bidding for this P3 agreement,” was clear that the project would not be subject to procurement laws.  Thus, the court concluded, “the I-95 P3 lease of State travel plazas in exchange for revenue and other benefits is not covered by the term ‘procurement’ as defined by Maryland law and regulation.”

          The court dismissed with prejudice the majority of Plaintiff’s claims because the procurement laws and regulations the MTA allegedly violated did not apply to the I-95 P3 project.  The court dismissed other claims, such as biased and capricious action by the MTA, for incomplete factual pleading.  Plaintiff’s sole remaining claim was that the award was illegal and void because the MTA submitted it to only two of three legislative committees as required by the Maryland Code, Transportation Article § 4-406(f).  The court agreed that MTA failed to comply with the statute, but it invoked policy justifications in declining to void the award for a technical statutory violations.  The court reasoned: “Nothing in the record suggests that the public interest will be seriously harmed by the enforcement of this agreement as opposed to a rehashing of the bidding and award process.”  Further supporting the court’s conclusion was Plaintiff’s waiver of this claim by its failure to raise the issue during the bidding process.   

         

The full opinion is available in PDF. 

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.