Filed: June 6, 2012
Opinion by Judge Ronald B. Rubin
Held: Applying the standard newly announced by the Court of Appeals, by which trial courts are to assess the decisions of special litigation committees in response to shareholder demands, the circuit court held that the committee in this case used proper methods, focused on the correct issues, and reached a reasonable, good faith business decision. Accordingly, the court accepted its recommendation to terminate the pending derivative litigation.
Facts:In Boland v. Boland, 423 Md. 296 (2011), the Court of Appeals announced new standards to be used when trial courts review the decisions of a special litigation committee ("SLC") in a derivative suit. We analyzed that opinion, with a full account of the facts, in a previous post. The case was returned to the circuit court for disposition consistent with the standard.
Pursuant to the standard, the circuit court considered the evidence concerning how the SLC members were chosen, the relationships, if any, among the SLC and the company board(s), and the methods and procedures of the SLC investigation, the issues reviewed, and the basis for it conclusions.The circuit court was to determine whether there was a reasonable basis for the SLC's conclusions. The burden of proof was on the SLC to show its independence and the reasonableness of its investigation and conclusion(s).
BTA and BTS were related, closely held Maryland S corporations.They were owned by husband and wife, who issued stock over time to eight children and some long-term employees. Each recipient executed a stock purchase agreement ("SPA") that restricted transfer. After the death of the founder/husband, his wife sold her stock back to the companies for an annuity. This was followed by a series of stock sales to some but not all of the children. When the non-participating children found out, they were upset.
After one child/shareholder died, the executor of her estate refused to sell the stock back to the companies. The companies sued for a declaration seeking to enforce the SPA. Each stockholder was named as an interested party. The children/shareholders who had been left out of the latest stock sales then filed a counterclaim advancing claims against the board members of each corporation.The counterclaimants also filed a derivative action based on exactly the same facts.
The companies moved to dismiss, advising the court that the boards of both companies had voted to form an SLC of two newly appointed directors who did not participate in the offending stock transactions.The SLC also hired independent, outside counsel. The circuit court stayed the litigation pending the outcome of the SLC inquiry.
After an investigation, the SLC issued its report and recommended that the derivative action be terminated.
Analysis: As an initial matter, the circuit court noted that the factual allegations of the direct claims against the directors track those of the derivative complaint. The court assessed the viability of the claims as direct and/or derivative. Relying on the standard set forth in Paskowitz v. Wohlstadter, 151 Md. App. 1 (1993), the circuit court posed the relevant inquiry as two-fold: 1) who suffered the alleged harm, the corporation or the individuals; and 2) who would receive the benefit of any recovery?
The court summarized the thrust of the claims as: 1) the defendants improperly redeemed the mother's stock for insufficient consideration; and 2) the claimants were excluded from the "sweet deal" of the subsequent stock sales. The court concluded that the harm alleged was to the companies, not the individual stockholders suing. Thus, the claims should be considered derivative.
Next, the court assessed the independence of the SLC and its counsel.The court noted that the board undertook a lengthy search for suitable candidates. One of the new directors was an experienced CPA. The other an experienced lawyer. The SLC selected another experienced lawyer as outside, independent counsel. The SLC members and its counsel had no prior experience or contacts with the parties. On this basis, the circuit court concluded the search for and retention of the SLC directors was proper and that the SLC was independent.
Next, the court assessed the reasonableness of the SLC's investigation and conclusions. The court held that there is no formula or set procedure that an SLC must follow. In sum, the SLC must act reasonably to investigate the theories of recovery and obtain and review information relevant to the subject matter. Here, the SLC investigated for five months. It solicited briefs from all parties outlining their legal positions. The companies did so. The claimants did not.The SLC also obtained and reviewed relevant documents, interviewed 11 witnesses (including the key actors), and spent at least 160 hours in the process. The SLC met with counsel eight times before issuing a report. The SLC also relied on generally accepted stock valuation methodologies, sources of information, and four independent appraisals.
On that basis, the court held that the SLC understood its role, employed proper methods of investigation, and focused on the right legal and factual issues. The court concluded that the SLC reached a reasonable, good faith business decision, in a reasonable and fair manner, and it accepted its recommendation to terminate the derivative litigation.
The full opinion is available in pdf.
Wednesday, June 27, 2012
Friday, June 8, 2012
MRA Property Management, Inc. v. Armstrong (Ct. of Appeals)
Filed: April 30, 2012
Opinion by Judge Lynne Battaglia
Held: The Maryland Consumer Protection Act (“MCPA”) could apply to disclosures made in a resale certificate by a condominium association and its management company during the sale of a condominium if the information provided is essential to the transaction, even though neither entity is a direct seller. A disclosure could also violate the MCPA if it is false or misleading, or had the capacity, tendency, or capability of misleading even if it complies with the Maryland Condominium Act.
Facts: This case arises from a special assessment imposed on all unit owners of the Tomes Landing Condominiums to pay for water damage to the buildings allegedly caused by improper construction of the buildings and incorrect installation of flashing that allowed water to seep behind the building facades and possibly compromise the structural integrity of the condominiums. The unit purchasers alleged that the extent of the water damage had been known by the condominium association (the "Association") and its management company ("MRA") since 1996 and they failed to disclose such information in the resale package. The unit purchasers were granted partial summary judgment in the amount of $1,000,000 against the Association and MRA in circuit court. The basis for the award was that the operating budget the Association and MRA provided as part of a resale package to unit purchasers violated the MCPA because the budgets “had the capacity, tendency and effect of misleading the movants in connection with their purchases of the condominiums in Tomes Landing….”
Facts: This case arises from a special assessment imposed on all unit owners of the Tomes Landing Condominiums to pay for water damage to the buildings allegedly caused by improper construction of the buildings and incorrect installation of flashing that allowed water to seep behind the building facades and possibly compromise the structural integrity of the condominiums. The unit purchasers alleged that the extent of the water damage had been known by the condominium association (the "Association") and its management company ("MRA") since 1996 and they failed to disclose such information in the resale package. The unit purchasers were granted partial summary judgment in the amount of $1,000,000 against the Association and MRA in circuit court. The basis for the award was that the operating budget the Association and MRA provided as part of a resale package to unit purchasers violated the MCPA because the budgets “had the capacity, tendency and effect of misleading the movants in connection with their purchases of the condominiums in Tomes Landing….”
The Court of Appeals granted petitions for writ of certiorari and vacated the circuit court’s grant of summary judgment saying that the MCPA does apply, but the Association and MRA were required to disclose only approved, not proposed or contemplated, capital expenditures in the operating budgets they provided to prospective purchasers. The Court of Appeals remanded the case to consider whether the Association and MRA violated § 11-135(a)(4)(x) of the Maryland Condominium Act pertaining to disclosing whether the Association had “knowledge of any violation of the health or building codes with respect to the unit, the limited common elements assigned to the unit, or any other portion of the condominium.”
Both parties filed Motions for Reconsideration of the Court of Appeals decision.
Analysis: The Court of Appeals granted the motions and decided there could be no violation of §11-135(a)(4)(x) because it is “knowledge of a charged violation…rather than the conduct underlying the violation, that requires disclosure” under that section. As a result the Court found that “[b]ecause they were never issued a notice of any such violations, MRA and the Association could not have violated §11-135(a)(4)(x).”
The Court held that the MCPA may extend to one who is not the direct seller because “[i]t is quite possible that a deceptive trade practice committed by someone who is not the seller would so infect the sale or offer for sale to a consumer that the law would deem the practice to have been committed ‘in’ the sale or offer for sale.” Hoffman v. Stamper, 385 Md. 1, 32 (2005). Under the principles espoused in Hoffman, the Court found that the operating budgets provided by the Association and MRA “could have sufficiently implicated them in the entire transaction so as to impose liability under the [MCPA], given that every plaintiff averred in his or her affidavit that he or she would not have purchased a unit if the budget…had disclosed the expenses necessary to correct the problems with the condominium buildings.”
In addition, the Court found that the statutory requirement to make certain disclosures to potential unit owners “injects MRA and the Association into the sale transaction as central participants because, were they to have failed to provide these materials, the contract for sale would not have been enforceable.”
The Court overruled the trial judge’s entry of summary judgment as a matter of law and remanded the case to the Circuit Court for Cecil County to decide whether the mandatory disclosures made by the Association and MRA were false or misleading, or had the capacity, tendency, or capability of misleading in violation of the MCPA.The full opinion is available in PDF.
Saturday, May 5, 2012
Kumar v. Dhanda (Ct. of Appeals)
Filed May 2, 2012
Opinion By Judge Clayton Greene, Jr.
Held:
While nonbinding arbitration, mandated by the contract, may have constituted a condition precedent to litigation, pursuing arbitration neither postponed the accrual of the underlying breach of contract claims nor otherwise tolled the statute of limitations applicable to maintaining an action in court.
Facts:
Petitioner and Respondent entered into an employment agreement on August 28, 2001. The contract contained a non-compete clause which prohibited Respondent from practicing within a specified radius of Petitioner’s multiple offices or soliciting or accepting Petitioner’s patients for three years following the expiration of the contract, or through August of 2005. The contract also included a standard mandatory, non-binding arbitration clause.
The agreement was not renewed upon termination on August 31, 2002. Soon thereafter, Respondent filed an initial suit for breach of contract against Petitioner in the Circuit Court for Anne Arundel County seeking damages for a breach of contract based on Petitioner’s refusal to grant Respondent partner status and the withholding of certain monies.
Four months later, on February 26, 2003, Petitioner filed a motion to compel arbitration and to dismiss the action. The judge presiding in Anne Arundel County dismissed the action without prejudice on April 24, 2003, stating that the “claims are subject to mandatory arbitration,” but noting that “[t]he case may be reopened to enforce the arbitration.”
On April 29, 2005 Petitioner filed, in the Circuit Court for Baltimore City, a petition to compel arbitration and to appoint an arbitrator. The petition also included separate counts concerning the substantive claims for breach of contract and breach of the non-compete provision. On March 9, 2006, Respondent filed both a response to Petitioner’s petition to compel arbitration and his own motion to dismiss the substantive counts for improper venue and as claims subject to mandatory arbitration. Petitioner then filed a response to the motion to dismiss, offering to withdraw the substantive counts if the Circuit Court would compel arbitration in order to resolve the issues. The court dismissed the substantive counts on April 28, 2006, but did not order arbitration. On August 25, 2006, Petitioner filed a motion for summary judgment, urging the Circuit Court for Baltimore City to grant the earlier petition to compel arbitration. Following a bench trial on November 20, 2006 the judge granted the petition to compel arbitration.
Petitioner submitted the matter to the arbitrator in March of 2008. The arbitrator denied all relief to Petitioner and also denied relief to Respondent, save for an award of $868.00 as reimbursement for certain disability insurance premiums.
Finally, on March 16, 2009, almost a year after the arbitration award was issued, Petitioner filed the instant action in the Circuit Court for Montgomery County. The complaint stated that “[t]he Agreement requires arbitration as a requirement before Plaintiff can pursue a remedy in court . . . [t]he matter went to arbitration, and a decision in favor of the Defendant was rendered in June of 2008. This matter is brought de novo.” Respondent filed a motion to dismiss, arguing that the applicable three-year statute of limitations barred the action because the alleged breaches of contract occurred between 2002 and 2005. Petitioner filed in opposition, contending that, because completion of arbitration was a condition precedent to filing a claim, the statute of limitations had not begun to run until the arbitration decision of June 20, 2008. After a hearing and supplemental briefing by the parties, Judge McGann, of the Circuit Court for Montgomery County dismissed the action with prejudice.
Analysis:
The applicable statute of limitations is encompassed in § 5-101 of the Courts and Judicial Proceedings Article, which states: “[a] civil action at law shall be filed within three years from the date it accrues unless another provision of the Code provides a different period of time within which an action shall be commenced.” In the context of the statute of limitations, “[t]he law is concerned with accrual in the sense of testing whether all of the elements of a cause of action have occurred so that it is complete.” St. Paul Travelers v. Millstone, 412 Md. 424, 432 (2010). In the instant case, although not specifying the particular dates, both parties agree that the alleged breaches of contract occurred more than three years prior to the filing of the complaint in the Circuit Court for Montgomery County.
The cases Petitioner cites in order to assert that the statute of limitations does not begin to run until a plaintiff can “maintain his action to a successful result” all concerned whether the necessary elements of a cause of action had arisen under the facts that were presented. In the instant case, neither party disputes that all of the elements of Petitioner’s breach of contract claims existed, at the very latest, as of the dates upon which the applicable contractual provisions terminated. Like the situation in Arroyo v. Board of Educ. of Howard County, 381 Md. 646 (2004), while resolution of the legal action must wait until the satisfaction of the condition precedent, the court’s jurisdiction may be maintained and the claim properly stayed prior to that time.
The court could find no applicable exception to § 5-101, or language within the Maryland Uniform Arbitration Act, §§ 3-201 to 3-234, that would toll the statute of limitations in this case. In Philip Morris v. Christensen, the court explicated for the first time two factors that continue to guide consideration of whether to apply a judicial tolling exception in a particular case. In order for an exception to be applied the court must find that: “there is persuasive authority or persuasive policy considerations supporting the recognition of the tolling exception, and, recognizing the tolling exception is consistent with the generally recognized purposes for the enactment of statutes of limitations.” Philip Morris, 394 Md. at 238 (2006). While, to be sure, arbitrating parties are on notice of any possible claims against them, thereby guarding them from stale claims, another purpose of the statute of limitations would be threatened by tolling in this situation. The court has repeatedly touted the value of statutes of limitations as not only ensuring fairness between the parties, but also as essential to judicial economy and the pursuit of diligence in litigation. Petitioner’s pursuit of his legal claims was not vigilant.
The full opinion is available in PDF.
Opinion By Judge Clayton Greene, Jr.
Held:
While nonbinding arbitration, mandated by the contract, may have constituted a condition precedent to litigation, pursuing arbitration neither postponed the accrual of the underlying breach of contract claims nor otherwise tolled the statute of limitations applicable to maintaining an action in court.
Facts:
Petitioner and Respondent entered into an employment agreement on August 28, 2001. The contract contained a non-compete clause which prohibited Respondent from practicing within a specified radius of Petitioner’s multiple offices or soliciting or accepting Petitioner’s patients for three years following the expiration of the contract, or through August of 2005. The contract also included a standard mandatory, non-binding arbitration clause.
The agreement was not renewed upon termination on August 31, 2002. Soon thereafter, Respondent filed an initial suit for breach of contract against Petitioner in the Circuit Court for Anne Arundel County seeking damages for a breach of contract based on Petitioner’s refusal to grant Respondent partner status and the withholding of certain monies.
Four months later, on February 26, 2003, Petitioner filed a motion to compel arbitration and to dismiss the action. The judge presiding in Anne Arundel County dismissed the action without prejudice on April 24, 2003, stating that the “claims are subject to mandatory arbitration,” but noting that “[t]he case may be reopened to enforce the arbitration.”
On April 29, 2005 Petitioner filed, in the Circuit Court for Baltimore City, a petition to compel arbitration and to appoint an arbitrator. The petition also included separate counts concerning the substantive claims for breach of contract and breach of the non-compete provision. On March 9, 2006, Respondent filed both a response to Petitioner’s petition to compel arbitration and his own motion to dismiss the substantive counts for improper venue and as claims subject to mandatory arbitration. Petitioner then filed a response to the motion to dismiss, offering to withdraw the substantive counts if the Circuit Court would compel arbitration in order to resolve the issues. The court dismissed the substantive counts on April 28, 2006, but did not order arbitration. On August 25, 2006, Petitioner filed a motion for summary judgment, urging the Circuit Court for Baltimore City to grant the earlier petition to compel arbitration. Following a bench trial on November 20, 2006 the judge granted the petition to compel arbitration.
Petitioner submitted the matter to the arbitrator in March of 2008. The arbitrator denied all relief to Petitioner and also denied relief to Respondent, save for an award of $868.00 as reimbursement for certain disability insurance premiums.
Finally, on March 16, 2009, almost a year after the arbitration award was issued, Petitioner filed the instant action in the Circuit Court for Montgomery County. The complaint stated that “[t]he Agreement requires arbitration as a requirement before Plaintiff can pursue a remedy in court . . . [t]he matter went to arbitration, and a decision in favor of the Defendant was rendered in June of 2008. This matter is brought de novo.” Respondent filed a motion to dismiss, arguing that the applicable three-year statute of limitations barred the action because the alleged breaches of contract occurred between 2002 and 2005. Petitioner filed in opposition, contending that, because completion of arbitration was a condition precedent to filing a claim, the statute of limitations had not begun to run until the arbitration decision of June 20, 2008. After a hearing and supplemental briefing by the parties, Judge McGann, of the Circuit Court for Montgomery County dismissed the action with prejudice.
Analysis:
The applicable statute of limitations is encompassed in § 5-101 of the Courts and Judicial Proceedings Article, which states: “[a] civil action at law shall be filed within three years from the date it accrues unless another provision of the Code provides a different period of time within which an action shall be commenced.” In the context of the statute of limitations, “[t]he law is concerned with accrual in the sense of testing whether all of the elements of a cause of action have occurred so that it is complete.” St. Paul Travelers v. Millstone, 412 Md. 424, 432 (2010). In the instant case, although not specifying the particular dates, both parties agree that the alleged breaches of contract occurred more than three years prior to the filing of the complaint in the Circuit Court for Montgomery County.
The cases Petitioner cites in order to assert that the statute of limitations does not begin to run until a plaintiff can “maintain his action to a successful result” all concerned whether the necessary elements of a cause of action had arisen under the facts that were presented. In the instant case, neither party disputes that all of the elements of Petitioner’s breach of contract claims existed, at the very latest, as of the dates upon which the applicable contractual provisions terminated. Like the situation in Arroyo v. Board of Educ. of Howard County, 381 Md. 646 (2004), while resolution of the legal action must wait until the satisfaction of the condition precedent, the court’s jurisdiction may be maintained and the claim properly stayed prior to that time.
The court could find no applicable exception to § 5-101, or language within the Maryland Uniform Arbitration Act, §§ 3-201 to 3-234, that would toll the statute of limitations in this case. In Philip Morris v. Christensen, the court explicated for the first time two factors that continue to guide consideration of whether to apply a judicial tolling exception in a particular case. In order for an exception to be applied the court must find that: “there is persuasive authority or persuasive policy considerations supporting the recognition of the tolling exception, and, recognizing the tolling exception is consistent with the generally recognized purposes for the enactment of statutes of limitations.” Philip Morris, 394 Md. at 238 (2006). While, to be sure, arbitrating parties are on notice of any possible claims against them, thereby guarding them from stale claims, another purpose of the statute of limitations would be threatened by tolling in this situation. The court has repeatedly touted the value of statutes of limitations as not only ensuring fairness between the parties, but also as essential to judicial economy and the pursuit of diligence in litigation. Petitioner’s pursuit of his legal claims was not vigilant.
The full opinion is available in PDF.
Tuesday, May 1, 2012
College Park Pentecostal Holiness Church v. General Steel Corp. (Maryland U.S.D.C.)
Filed January 19, 2012.
Opinion by Judge Peter Messitte
Held: An arbitration clause in a contract may be unconscionable, and thus unenforceable, if there is stark inequality of bargaining power between the parties and the terms unreasonably favor one side over the other.
Note: In this case, the court applied Colorado law pursuant to the terms of the contract (which is substantively similar to Maryland law).
Facts: This case arises from a contract dispute between a church and a building supplies company. The church was located in Maryland; supplier was located in Colorado. The church was presented with a contract and told they had one day to sign because a pricing special would no longer be available. The church signed the contract with supplier which included an arbitration clause. The arbitration clause provided 1) that any arbitration hearing shall be held in Denver, 2) any challenge that relates to whether claims are arbitrable shall obligate the challenging party to pay the attorney's fees and costs of defense to the non-challenging party, and 3) the party initiating arbitration shall advance all costs thereof.
The church filed a breach of contract claim. The supplier filed a motion to dismiss and sought to enforce the venue clause, thus forcing the church into arbitrating the matter in Colorado. The church claimed that portions of the arbitration clause were unconscionable, specifically the venue and cost allocation provisions.
Analysis: Under Colorado law, unconscionability requires an overreaching on the part of one party (i.e. inequality of bargaining power or an absence of meaningful choice by the second party) and contract terms which unreasonably favor the first party. Factors relevant to an unconscionability analysis include:
Opinion by Judge Peter Messitte
Held: An arbitration clause in a contract may be unconscionable, and thus unenforceable, if there is stark inequality of bargaining power between the parties and the terms unreasonably favor one side over the other.
Note: In this case, the court applied Colorado law pursuant to the terms of the contract (which is substantively similar to Maryland law).
Facts: This case arises from a contract dispute between a church and a building supplies company. The church was located in Maryland; supplier was located in Colorado. The church was presented with a contract and told they had one day to sign because a pricing special would no longer be available. The church signed the contract with supplier which included an arbitration clause. The arbitration clause provided 1) that any arbitration hearing shall be held in Denver, 2) any challenge that relates to whether claims are arbitrable shall obligate the challenging party to pay the attorney's fees and costs of defense to the non-challenging party, and 3) the party initiating arbitration shall advance all costs thereof.
The church filed a breach of contract claim. The supplier filed a motion to dismiss and sought to enforce the venue clause, thus forcing the church into arbitrating the matter in Colorado. The church claimed that portions of the arbitration clause were unconscionable, specifically the venue and cost allocation provisions.
Analysis: Under Colorado law, unconscionability requires an overreaching on the part of one party (i.e. inequality of bargaining power or an absence of meaningful choice by the second party) and contract terms which unreasonably favor the first party. Factors relevant to an unconscionability analysis include:
"[A] standardized agreement executed by the parties of unequal bargaining strength; lack of opportunity to read or become familiar with the document before signing it; use of fine print in the portion of the contract containing the provision; absence of evidence that the provision was commercially reasonable or should reasonably have been anticipated; the terms of the contract, including substantive unfairness; the relationship of the parties, including factors of assent, unfair surprise and notice; and all the circumstances surrounding the formation of the contract, including its commercial setting, purpose and effect." quoting Davis v. M.L.G. Corp., 712 P.2d 985, 991 (Colo. 1986).
The Maryland case law governing unconscionability is similar to the Colorado law. In Walther v. Sovereign Bank, the Maryland Court of Appeals held that unconscionability requires both a procedural and substantive unfairness. 386 Md. 412 (2005). Procedural unfairness is evident by one party's lack of meaningful choice or unfair bargaining power. Substantive unfairness is evident by contractual terms that unreasonably favor the other party. Id.
In this case, the court, following Colorado law, found that the church was in an unfair bargaining position because the church representative who reviewed and signed the contract did not have business acumen or benefit of counsel. The court also found that the pressure to sign within one day added to the lack of meaningful choice. The court also found the terms of the arbitration clause unreasonably favored the supplier because of the economic hardships the church would incur by arbitrating in Colorado rather than in Maryland. The court also found the provision requiring the church to pay up front all costs of the arbitration and attorney's fees for the supplier was extremely unfair.
The full opinion is available in PDF.
Tuesday, April 24, 2012
Weinberg v. Gold, et al. (Maryland U.S.D.C.)
Filed: March 12, 2012
Opinion by Judge James K. Bredar
Held: In a shareholder's derivative suit, the plaintiff shareholder failed to plead sufficient factual allegations to excuse demand on the corporation under the demand futility exception set forth in Werbowsky v. Collomb, 766 A.2d 123 (Md. 2001).
Facts: Plaintiff Arnold Weinberg (the "Shareholder") brought a derivative suit against various officers and directors of Biomed Realty Trust, Inc. (the "Company") alleging, among other things, breach of fiduciary duty for failing to rescind approval of an executive compensation plan rejected in a "say on pay" vote by the shareholders of the Company. The plan was formulated by a three-member compensation committee of directors and approved by the board. The issue before the Court was whether the Shareholder pled sufficient factual allegations to justify filing the suit without first making a demand on the Company.
Analysis: The Court cited Werbowsky v. Collomb, 766 A.2d 123 (Md. 2001) as the most recent, authoritative exposition of Maryland law on the issue of demand futility. Werbowsky affirmed the demand futility exception but limited it to matters in which the "allegations or evidence clearly demonstrate, in a very particular manner, either that (1) a demand, or a delay in awaiting a response to a demand, would cause irreparable harm to the corporation, or (2) a majority of the directors are so personally and directly conflicted or committed to the disputed decision that they cannot reasonably be expected to respond to a demand in good faith and within the ambit of the business judgment rule."
Recognizing the Werbowsky court's clear statement that mere participation in or approval of the challenged transaction by the directors does not excuse demand, the Court dismissed the Shareholder's argument that demand was futile because each director named in the suit was on the board when the compensation plan was approved, three directors were members of the compensation committee and two of the seven directors were officers of the Company and beneficiaries of the compensation plan. The Court recognized that the two directors who were officers of the Company and beneficiaries of the compensation plan were arguably "so personally and directly conflicted" that they could not reasonably be expected to respond to a demand in good faith and within the ambit of the business judgment rule. However, Werbowsky requires that a majority of the board be so personally disqualified before demand is excused. Likewise, the fact that directors are named in the suit does not mean that prior to the suit demand would have been futile. It if did, the Court opined, the demand requirement would be nullified in every suit that named directors are defendants.
The Shareholder also sought to excuse demand on the basis that the directors' actions were not the product of valid business judgment. Werbowsky, however, implicitly disallows consideration of the merits of the case in analyzing demand futility. While recognizing that a "say on pay" vote can arguably provide the board with an opportunity to reconsider its executive compensation decisions, the Court concluded that it is not the equivalent of a pre-suit demand. Such a vote can, however, be reasonably considered as a non-conclusive factor in the demand futility analysis. The Court also rejected the Shareholder's analysis of the "say on pay" vote under Ohio and Delaware standards for demand futility because neither standard is comparable to the standard set forth in Werbowsky.
The full opinion is available in pdf.
Opinion by Judge James K. Bredar
Held: In a shareholder's derivative suit, the plaintiff shareholder failed to plead sufficient factual allegations to excuse demand on the corporation under the demand futility exception set forth in Werbowsky v. Collomb, 766 A.2d 123 (Md. 2001).
Facts: Plaintiff Arnold Weinberg (the "Shareholder") brought a derivative suit against various officers and directors of Biomed Realty Trust, Inc. (the "Company") alleging, among other things, breach of fiduciary duty for failing to rescind approval of an executive compensation plan rejected in a "say on pay" vote by the shareholders of the Company. The plan was formulated by a three-member compensation committee of directors and approved by the board. The issue before the Court was whether the Shareholder pled sufficient factual allegations to justify filing the suit without first making a demand on the Company.
Analysis: The Court cited Werbowsky v. Collomb, 766 A.2d 123 (Md. 2001) as the most recent, authoritative exposition of Maryland law on the issue of demand futility. Werbowsky affirmed the demand futility exception but limited it to matters in which the "allegations or evidence clearly demonstrate, in a very particular manner, either that (1) a demand, or a delay in awaiting a response to a demand, would cause irreparable harm to the corporation, or (2) a majority of the directors are so personally and directly conflicted or committed to the disputed decision that they cannot reasonably be expected to respond to a demand in good faith and within the ambit of the business judgment rule."
Recognizing the Werbowsky court's clear statement that mere participation in or approval of the challenged transaction by the directors does not excuse demand, the Court dismissed the Shareholder's argument that demand was futile because each director named in the suit was on the board when the compensation plan was approved, three directors were members of the compensation committee and two of the seven directors were officers of the Company and beneficiaries of the compensation plan. The Court recognized that the two directors who were officers of the Company and beneficiaries of the compensation plan were arguably "so personally and directly conflicted" that they could not reasonably be expected to respond to a demand in good faith and within the ambit of the business judgment rule. However, Werbowsky requires that a majority of the board be so personally disqualified before demand is excused. Likewise, the fact that directors are named in the suit does not mean that prior to the suit demand would have been futile. It if did, the Court opined, the demand requirement would be nullified in every suit that named directors are defendants.
The Shareholder also sought to excuse demand on the basis that the directors' actions were not the product of valid business judgment. Werbowsky, however, implicitly disallows consideration of the merits of the case in analyzing demand futility. While recognizing that a "say on pay" vote can arguably provide the board with an opportunity to reconsider its executive compensation decisions, the Court concluded that it is not the equivalent of a pre-suit demand. Such a vote can, however, be reasonably considered as a non-conclusive factor in the demand futility analysis. The Court also rejected the Shareholder's analysis of the "say on pay" vote under Ohio and Delaware standards for demand futility because neither standard is comparable to the standard set forth in Werbowsky.
The full opinion is available in pdf.
Thursday, March 15, 2012
Boland v. Boland; Boland v. Boland Trane Associates, Inc. (Ct. of Appeals)
Filed: October 25, 2011
Opinion by Judge Sally D. Adkins.
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 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.
Wednesday, February 8, 2012
Meade v. Shangri-La Partnership (Ct. of Appeals)
Filed: January 26, 2012
Opinion by Judge John C. Eldridge
Held: A plaintiff with a latex allergy proffered enough evidence of discrimination because of a "handicap" under the Maryland code by showing that her son's school declined her request that it use non-latex products so she could enter the school safely and that the school asked her to withdraw her son when she threatened litigation.
Facts: A plaintiff with a latex allergy asked her son's school to switch from latex gloves to non-latex gloves for changing diapers so that she could safely enter the school. The school declined. In response, the plaintiff sent a letter to the school stating that she had rights and asking the school not to deny her of her rights. The school replied by asking the plaintiff to withdraw her son, stating that it did not wish to be exposed to litigation from the plaintiff.
The plaintiff sued the school for discrimination on the basis of a handicap in violation of Maryland Code Article 49B and the Howard County Code. The plaintiff claimed that the latex allergy was a "handicap" under the county code and that the school refused to make reasonable accommodations and then retaliated against her for complaining.
The plaintiff won a jury verdict in the circuit court, and the defendant appealed. The Court of Special Appeals reversed, holding that the term "handicap" should be construed to establish a demanding standard. The Court of Special Appeals held that there was no evidence to support a finding that the plaintiff's allergy prevented or severely restricted a major life activity. Accordingly, she was not handicapped. The plaintiff then appealed.
Analysis: At the Court of Appeals, the plaintiff argued that it was error to construe the term "handicap" to create a demanding standard. The Court of Appeals agreed, and it reversed the Court of Special Appeals.
The Court noted that "handicap" is defined as a physical or mental impairment that substantially limits on or more major life activity. The Court held that these phrases must be given their "usual meaning." Using this standard, the Court held that there was sufficient evidence from which the jury could conclude the plaintiff had shown an substantial impairment to a major life activity - her ability to socialize and interact with her son at school.
The Court expressly rejected a "demanding standard" and said that actions like the plaintiff's are to be liberally construed in favor of the person claiming to be the victim.
Dissent: In dissent, Judge Adkins cautioned that such an open-ended, uncritical approach to disability claims created a worrisome precedent without giving sufficient guidelines other than the doctrine advising liberal interpretation of remedial legislation. She pointed out that the opinion gives no standards on how to determine what constitutes a "substantial limitation" or a "major life activity." Because of this, the plaintiff's claim, and future plaintiff's claims, are not subject to any rigorous legal standard other than a jury's opinion.
Judge Adkins noted that claimants and the businesses they sue will "have virtually no standard for differentiating acceptable and unacceptable conduct in terms of dealing with people's differences in health status." She stated that the Court "should consider the extensive litigation spawned by the almost identical ADA, much of it based on non-qualifying claims."
The full opinion is available in PDF.
Opinion by Judge John C. Eldridge
Held: A plaintiff with a latex allergy proffered enough evidence of discrimination because of a "handicap" under the Maryland code by showing that her son's school declined her request that it use non-latex products so she could enter the school safely and that the school asked her to withdraw her son when she threatened litigation.
Facts: A plaintiff with a latex allergy asked her son's school to switch from latex gloves to non-latex gloves for changing diapers so that she could safely enter the school. The school declined. In response, the plaintiff sent a letter to the school stating that she had rights and asking the school not to deny her of her rights. The school replied by asking the plaintiff to withdraw her son, stating that it did not wish to be exposed to litigation from the plaintiff.
The plaintiff sued the school for discrimination on the basis of a handicap in violation of Maryland Code Article 49B and the Howard County Code. The plaintiff claimed that the latex allergy was a "handicap" under the county code and that the school refused to make reasonable accommodations and then retaliated against her for complaining.
The plaintiff won a jury verdict in the circuit court, and the defendant appealed. The Court of Special Appeals reversed, holding that the term "handicap" should be construed to establish a demanding standard. The Court of Special Appeals held that there was no evidence to support a finding that the plaintiff's allergy prevented or severely restricted a major life activity. Accordingly, she was not handicapped. The plaintiff then appealed.
Analysis: At the Court of Appeals, the plaintiff argued that it was error to construe the term "handicap" to create a demanding standard. The Court of Appeals agreed, and it reversed the Court of Special Appeals.
The Court noted that "handicap" is defined as a physical or mental impairment that substantially limits on or more major life activity. The Court held that these phrases must be given their "usual meaning." Using this standard, the Court held that there was sufficient evidence from which the jury could conclude the plaintiff had shown an substantial impairment to a major life activity - her ability to socialize and interact with her son at school.
The Court expressly rejected a "demanding standard" and said that actions like the plaintiff's are to be liberally construed in favor of the person claiming to be the victim.
Dissent: In dissent, Judge Adkins cautioned that such an open-ended, uncritical approach to disability claims created a worrisome precedent without giving sufficient guidelines other than the doctrine advising liberal interpretation of remedial legislation. She pointed out that the opinion gives no standards on how to determine what constitutes a "substantial limitation" or a "major life activity." Because of this, the plaintiff's claim, and future plaintiff's claims, are not subject to any rigorous legal standard other than a jury's opinion.
Judge Adkins noted that claimants and the businesses they sue will "have virtually no standard for differentiating acceptable and unacceptable conduct in terms of dealing with people's differences in health status." She stated that the Court "should consider the extensive litigation spawned by the almost identical ADA, much of it based on non-qualifying claims."
The full opinion is available in PDF.
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