September 30, 2015
Insurance policy covering “any dependent person in [insured’s] care” was not ambiguous and did not cover an adult, non-relative who lived in insured’s household but had a job, paid modest rent, and was not under the control of the insured.
In June 2011, Plaintiffs were struck by an automobile that was negligently driven by Driver. Driver was twenty-two years old at the time, and the automobile involved in the accident was owned by Insured. Insured’s automobile insurance limit was $500,000, an amount Plaintiffs alleged was insufficient to cover their damages. Insured also held an “umbrella” policy with Defendant that supplied up to $5,000,000 in coverage for negligence.
Driver had been living with Insured at the time of the accident for almost three years, though the two were not related. On three separate occasions, Driver moved out of Insured’s home, only to move back in. For nearly two years, Driver did domestic chores in exchange for room and board. Fourteen months before the accident, Driver obtained full-time employment earning $26,000 per year, and he agreed to pay $600 per month in rent to live with Insured. After obtaining his job, Driver was also responsible for his own personal expenses such as food, clothing, and telephone, which had previously been paid by Insured. Driver used Insured’s vehicle to get to and from work, but Driver was responsible for fuel costs.
In sworn testimony, Driver referred to Insured as “father” and “family,” but Insured never claimed Driver on his tax return, never designated Driver as a beneficiary on his health insurance policy, and never gave Driver any money or credit cards. Insured did not exercise any control over Driver’s comings and goings, and Driver was free to move out at any time, as he did on three occasions.
The umbrella policy held by Insured defined “insured person” to include “any dependent person in [Insured’s] care, if that person is a resident of [Insured’s] household.” Defendant filed for declaratory judgment against Insured, Plaintiffs, and Driver seeking a determination of whether the Insured’s umbrella policy provided coverage for Driver’s negligence. The trial court declared that Driver was not covered under Insured’s umbrella policy with Defendant, and Plaintiff appealed.
The court observed that, pursuant to principles of contract interpretation, the insurance policy must be construed in its entirety, giving effect to each clause to the extent reasonably possible. Moreover, in the event that an insurance policy contains ambiguous language, the language of the policy is to be construed liberally in favor of the insured and against the insurer as the drafter of the instrument. A policy term is ambiguous if it is susceptible to more than one meaning to a reasonable person, but it is not ambiguous simply because it cannot be precisely defined as to make clear its application in all varying factual situations.
Turning to the meanings of the terms, “dependent person” and “in the care of,” the court found that the terms overlap, but are not synonymous. In keeping with the basic principles of contract interpretation, the court was to give effect to each clause and avoid treating either term as surplusage. Finding that no Maryland cases defined these terms in context, the court turned to two out-of-jurisdiction cases, Girrens v. Farm Bureau Mut. Ins. Co.
, 715 P.2d 389 (Kan. 1986) and Henderson v. State Farm Fire & Cas. Co.
, 596 N.W.2d 190 (Mich. 1999).
, the Kansas Supreme Court found that although the term “dependent person” may have different meanings under different factual situations, it was not so ambiguous as to require construction in favor of the insured. The Girrens
court further defined “dependent person” as one who relies on another to provide “substantial contributions[,] without which he would be unable to afford the reasonable necessities of life.” Adopting that definition, the court held that Driver was not a dependent person because he had a full-time job, paid a modest rent, and performed additional work for the Insured’s household.
The court looked to Henderson
for defining the phrase, “in care of.” In that case, the Michigan Supreme Court found that the phrase is not ambiguous, but rather it is “a colloquial or idiomatic phrase that is peculiar to itself and readily understood as a phrase by speakers and readers of our language.” The Henderson
court then devised a non-exclusive list of factors to determine whether one person is “in care of” someone else: (1) a legal responsibility to care for the person; (2) some form of dependency; (3) supervisory or disciplinary responsibility; (4) provision of substantial essential financial support; (5) duration of living arrangement and whether it is temporary or permanent; (6) the age of the person receiving the care; (7) the physical and mental health status of the person receiving the care. Although there was some form of dependency of Driver on Insured in that Driver was paying only a modest rent and using Insured’s care to get to and from work, the court found that the other seven factors supported the conclusion that Driver was not “in the care of” Insured. Thus, there was ample evidence to support the trial court’s declaratory judgment for Defendant.
The full opinion is available in PDF
Filed: October 1, 2015
Opinion by: Judge Douglas R. M. Nazarian
Holdings: (1) Maryland Court of Special Appeals upheld Tax Court’s finding of fraud, holding that appellant taxpayer’s (“Taxpayer”) intent to defraud Maryland Comptroller of Admissions and Amusement tax revenues could be inferred from circumstantial evidence of understatement of income, failure to maintain records, and concealment of assets. (2) In the absence of Taxpayer’s relevant records of sales or income, the Comptroller’s tax liability assessment was supported by substantial evidence of reasonableness, making the Tax Court’s affirmance of the assessment not in error. (3) No actionable claim of spoliation occurred where duty to preserve and evidentiary advantage were not present.
From 1993 until 2009, Taxpayer owned and operated a business providing video poker machines and other coin-operated entertainment to establishments.
Under Md. Code §17-405
, and 414
of the Business Regulation Article, it is lawful to operate video poker machines without making cash payouts, provided that the machines are properly licensed and taxes paid on all revenues generated.
However, Taxpayer ran afoul of the Code in several ways.
First, with Taxpayer’s knowledge and approval, proprietors of the establishments made cash payments to video poker winners, deducting the payouts from the profit split between Taxpayer and proprietors.
Second, Taxpayer kept no records of the cash payments, nor any records of individual revenues on a per-machine basis.
Third, Taxpayer calculated its tax liability net of the cash payments.
A wide-scale undercover police investigation conducted from 2006 to 2009 led to the seizure of 83 video poker machines owned by Taxpayer. Forensic analysis of the motherboards allowed police to determine the in- and out-credits from each machine and compile the data into a report later issued to the Comptroller’s Office. Although the investigating officers conceded that (1) proprietors likely did not pay out every credit won and (2) in- and out-credits from prior ownership of the machines could not be distinguished, the Comptroller calculated its assessment assuming that every out-credit was paid. Applying its hypothesis that 55% of in-credits would be paid out, the Comptroller assessed a tax deficiency of $2,159,724.97 for the 2000-2009 period, added interest and imposed a 100% fraud penalty.
Taxpayer appealed the assessment to the Tax Court in 2013, arguing that the payoff percentage was more likely between 20 and 25% due to (1) proprietors often declining to pay out-credits and (2) the unreliability of the in- and out-credits data where significant number of video poker machines had been purchased used. Accounting for these differences, Taxpayer’s expert testimony provided by a statistician placed the tax deficiency at $466,016.10. Taxpayer further disputed the fraud penalty on the theory that neither his employed CPAs, his retained attorney, nor his staff were aware the payouts were taxable, thus Taxpayer lacked requisite intent to defraud. The Tax Court was only partially persuaded, finding the record insufficient to change the Comptroller’s tax liability assessment, but using its discretion to adjust the fraud penalty to 50% by balancing the facts that the accounting was not perfectly accurate but Taxpayer’s fraud warranted a penalty.
Taxpayer filed petition for judicial review in the Circuit Court for Baltimore County which affirmed the Tax Court’s decision on June 5, 2014. Taxpayer thereafter filed a timely notice of appeal.
Analysis: Taxpayer presented the court with two questions for review: first, whether the Tax Court erred in imposing its fraud penalty without a finding of intent to evade payment. And second, whether the Tax Court erred in affirming an assessment based on admittedly erroneous assumptions and evidence the Comptroller failed to preserve.
The court began by pointing to a case both fully on-point and decided by the same court in 1993: Rossville Vending
In that case, Rossville’s video poker units had been placed in establishments whose proprietors paid cash payments directly to winners, but Rossville paid no taxes on the cash payments.
Finding no ambiguity in the amusement tax statute’s operative phrase ‘gross receipts,’ the Rossville
court found no room for reasonable argument for adjustments or deductions before calculation of the tax due.
Taxpayer pled ignorance: arguing that although he had personal relationships with Rossville Vending’s owners and knowledge of their business, he lacked actual knowledge of the Rossville court’s decision until after the Comptroller’s assessment, and so lacked any intent to withhold taxes.
The court next referenced Genie & Co.
, which held that direct evidence of fraud is unnecessary, but often inferred by circumstantial evidence.
court imported the federal “badges of fraud” doctrine to Maryland jurisprudence, highlighting seven factors to guide courts in identifying circumstantial evidence of fraud:
- Consistent and substantial understatements of income (or sales, in the sales tax arena);
- Failure to maintain adequate records;
- Implausible or inconsistent explanations of behavior, including lack of credible testimony before a tribunal;
- Concealment of assets;
- Failure to cooperate fully with tax authorities;
- Awareness of the obligations to file returns, report income or sales, and pay taxes, and;
- Failure to file returns.
Finding substantial evidence of badges one, two, and four in the failure to keep records of gross revenues, concealment to avoid criminal liability, and faulty accounting methods recording net income by location rather than per-machine basis, the court agreed with the Tax Court that the badges of fraud analysis indicated an intent to conceal revenue.
Even were the Taxpayer’s claimed ignorance legitimate, the court further found the failure to research its tax liability to be willful blindness, and tantamount to fraud.
Accordingly, the court affirmed the Tax Court’s penalty.
Turning next to Taxpayer’s arguments against the Comptroller’s method of calculation, the court noted that the Tax General Article TG §13-403
anticipated situations where parties neglected to keep accurate records (emphasis added):
(a) If a person … fails to keep the records required under §4-202 of this article, the Comptroller may
(1) Compute the admissions and amusement tax by using a factor….
* * *
(b) The factorutilized by the Comptroller pursuant to this section shall be developed by:
(1) a survey of the business… including any available records
(2) a survey of other persons… engaged in the same or similar business
(3) other means.
The court continued, pointing out that the plain meaning of the statute indicated the legislature had vested broad discretion in the Comptroller to use reasonable methods for calculating assessments against parties like Taxpayer. Indeed, the court found the Comptroller’s calculation methods to be supported by substantial evidence of reasonableness in light of the lack of relevant financial records. Using the only records available – those obtained by the police’s forensic investigation – the Comptroller calculated Taxpayer’s tax liability as best he could. As a result, the court found Taxpayer’s request to substitute his expert’s “guesstimate” for the Comptroller’s assessment notwithstanding Taxpayer’s failure to retain adequate records unconvincing. Such a finding would lead Maryland companies to keep no records, file no returns, and refer the Comptroller to unverifiable memories of employees; an untenable result. Thus the court found that the Tax Court did not err by relying on the Comptroller’s calculation.
Dealing finally with Taxpayer’s spoliation claim (which arose after a police agency destroyed the motherboards of the video poker machines), the court found the Comptroller lacked any duty to preserve the video poker machine motherboards because he neither possessed nor had access to them. Moreover, no evidentiary advantage existed because both the Comptroller and Taxpayer had copies of the police report. Accordingly, the court found no misbehavior to sanction.
The full opinion is available in PDF
Filed: October 1st, 2015
Opinion by: J. Berger.
Funds held in a joint account are presumed to be owned by both account holders, but the presumption can be rebutted by clear and convincing evidence to the contrary.
Creditor obtained a judgment against Son in the amount of $196,477.16 in the Circuit Court of Montgomery County. Creditor then sought to obtain a writ in order to garnish funds in a joint account held by Son and his Father. The Circuit Court issued the writ of garnishment for the joint bank account.
Father filed a motion asserting a claim to the funds in the account and requested a hearing on the matter. Son only accessed this account to handle affairs on behalf of his father. He never deposited funds of his own in the account, nor did he withdraw funds for personal usage. The Circuit Court denied his motion. Father filed motions to vacate, which were denied. All transactions from this account were explained and accounted for through witness testimony and documentation in the trial court.
Father appealed to The Court of Specials Appeals who remanded the case to the trial court. The trial court found in favor of the Father and this appeal followed.
Creditor argued that the funds held in a joint account were “per se” subject to garnishment. Creditor based this argument on the assertion that both holders can deposit and deplete funds at will.
The Court had not dealt with this matter before and drew from its analysis from a similar situation discussed in Wanex v. Provident State Bank of Preston 53 Md. App. 409, 413 (1983).
In that case a daughter was a signatory on her father’s business bank account. A creditor sought a writ of garnishment against the bank account. The father argued that the writ would interfere with the daughter’s interest in the account. The daughter never deposited any of her own funds into the jointly held account. The trial court decided that the daughter did not have an ownership interest in the account and the Court of Special Appeals affirmed.
The Court noted that: “the garnishing creditor can reach funds of the depositer only in cases where the depositer is the true owner thereof” Wanex, 53 Md. App. 413
The question becomes whether ownership should simply be based on the fact that an account holder has his or her name affixed to the account. The Court applied two factors from Wanex in order to define “true” ownership: 1) the exercise of control over the funds in the account and 2) contribution, or source of funds in the account. Various others factors can be considered as well for example; what parties paid taxes from the account, whose name appears on checks and who had possession of the documents for the account.
The Court stated that an account holder can rebut the presumption of ownership by proving, by clear and convincing evidence, which portion of the account belongs to each owner. The Court determined that “Maryland courts have long held, in a variety of contexts, that titling of a bank account and the right to withdraw from the account does not indicate ownership.”
The trial court considered the evidence in the form of testimony from the PNC branch manager, the Father, the Son and bank records. Because Son withdrew funds from the account exclusively for the purpose of overseeing renovations for his father’s beach home, the Court decided that the evidence presented in the trial court provided clear and convincing proof that the Father was the sole owner of the funds held the joint account.
The full opinion is available in PDF
June 23, 2015
(1) When a person signs an affidavit containing incorrect information, such person is generally on inquiry notice of any claim arising under such affidavit and the statute of limitations for such claim will not be tolled absent evidence of fraud or concealment or a fiduciary relationship between the party preparing the affidavit and the affiant; and
(2) To be liable for engaging in indirect false advertising regarding secondary mortgage loans and their availability under Md. Code Ann., Commercial Law § 12-403 (the "Secondary Mortgage Loan Law"), mere knowledge of false advertisements is not sufficient to violate the Secondary Mortgage Loan Law, a lender must do some act to bring about the false advertising.
In 2006 and 2007, three married couples (the "Borrowers") contacted realtors to express interest in selling their current homes and purchasing new ones. The realtors encouraged Borrowers to purchase a new home before selling their current home by obtaining home equity lines of credit ("HELOCs") against their current homes and then obtain a primary mortgage for the new home. The realtors referred Borrowers to Michelle Matthews, a loan officer for Propensity Mortgage Company, who informed Borrowers the HELOC strategy was a "common lending tool at Propensity."
Propensity Mortgage Company and Matthews, advertised in flyers on the website of some of the realtors, claiming that they could provide "Home Equity Lines and Loans (to make your client non-contingent)." Borrowers claimed they believed at all times that Matthews and Propensity were processing the HELOCs; however, Matthews referred the HELOCs to Suzanne Windesheim, a loan officer for National City Bank (now PNC Mortgage). The HELOCs were processed through National City Bank using false information contained in Borrowers' signed affidavits, allegedly added by Windesheim with Matthews' knowledge.
The Borrowers filed a putative class action lawsuit in the Circuit Court for Howard County, Maryland against National City and Windesheim alleging that National City and Windesheim engaged in indirect false advertising in violation of the Secondary Mortgage Loan Law through the actions of Propensity and Matthews.
: Borrowers argued that, because the information contained in the signed affidavits was false and because they were encouraged to sign without reading them, the statute of limitations had been tolled until the Borrowers had been contacted by counsel in 2010 and 2011 informing them that they may have been the victims of mortgage fraud. The Court, however, found no evidence to refute the fact that Borrowers were on inquiry notice of their claims in 2006 and 2007 when they closed their HELOCs and primary residential mortgages because: (1) Borrowers signed the affidavits containing the false information and there was no evidence National City Bank or Windersheim attempted to conceal the false information in the affidavits; and (2) neither National City Bank nor Windersheim owed Borrowers any fiduciary duties which would justify tolling the statute of limitations.
Secondary Mortgage and False Advertising
: The Court determined that the plain meaning of "indirect" as used in the Secondary Mortgage Loan Law provided two reasonable interpretation as to how a lender could advertise "indirectly" – (1) "by making a false or misleading statement to a potential borrower that the same potential borrower then re-communicates to another potential borrower" or (2) "by having another party advertise false or misleading statements on the first party's behalf."
The Court looked to the legislative history and policy purpose of the Secondary Mortgage Loan Law and reasoned that, because it was meant to protect consumers, it was reasonable to conclude that the Maryland General Assembly intended to proscribe both definitions of "indirect." The current law removed the phase "to cause to be placed before the public" from a prior version of the law and therefore, the Court inferred, the General Assembly intended that to be guilty of a violation of the Secondary Mortgage Loan Law a person must "bring about the placing of a false or misleading statement before the public." The Court applied the second definition of advertising indirectly and determined that neither National City Bank nor Windesheim violated the Secondary Mortgage Loan Law and that "mere knowledge that another is falsely advertising" would not violate the Secondary Mortgage Loan Law.
The Court also held that Windesheim and National City Bank were not vicariously liable for indirect advertising in violation of the Secondary Mortgage Loan Law under a civil conspiracy theory because there was no evidence that Windesheim knew Matthews and Prosperity were falsely advertising that Prosperity, not National City Bank, would handle the HELOCs.
The full opinion is available in PDF
Filed: May 13, 2015
Opinion by: Judge W. Michel Pierson
Holdings: (1) The conversion of preferred stock to cash in connection with a cash-out merger does not violate the redemption provisions of the preferred stock, when the transaction at issue does not constitute a redemption. (2) The conversion of preferred stock to cash in connection with a cash-out merger does not violate the provisions of the preferred stock that establish a limitation upon the right of preferred stockholders to convert their stock.
Facts: Plaintiff was a holder of preferred shares in defendant corporation. Defendant's charter authorized the corporation to issue shares of Series B Preferred Stock and Series C Preferred Stock. The Articles Supplementary classifying the preferred stock included the following terms:
[Section 3 provides for the payment of cumulative dividends at the yearly rate of 8.375% of the $25.00 per share liquidation preference of the Series B Preferred Stock (equivalent to a fixed annual amount of $2.09375 per share). The Series C Articles Supplementary contains similar terms, with an interest rate of 7.25% (equivalent to a fixed annual amount of $1.8125 per share). The Charter further provides that the Series B Preferred Stock is not redeemable prior to April 19, 2017, while the Series C Preferred Stock is not redeemable prior to January 25, 2018.]
On May 28, 2013, defendant entered into a Merger Agreement with an acquirer. According to the agreement, the acquirer would pay an amount in cash equal to $8.50 per share for each outstanding share of defendant's common stock, and each share of preferred stock would be converted into the right to receive the sum of $25.00 in cash plus an amount equal to any accrued and unpaid dividends up to but excluding the closing date of the merger.
Plaintiff feltaggrieved because holders of the preferred stock would lose their right to receive future dividendsafter the merger. On October 8, 2013, Plaintiff sued the defendant and alleged that the merger was a breach of the company’s contract with its preferred stockholders and that the directors had violated fiduciary duties.
Analysis: The complaint of plaintiff containedfour counts, each denied by the court.
For Count I, plaintiff asserted a breach of contract claim alleging the transaction violated the redemption provisions of the Articles Supplementary. The court discussed the following: (1) While section 6 of the Articles Supplementary does limit defendant’s right to redeem the preferred stock, which would restrict the conversion of the preferred stocks, the transaction at issue did not constitute a redemption, because defendant did not acquire the stock. In addition, the Maryland General Corporation Law ("MGCL") authorizes a Maryland corporation to merge into another entity. The MGCL provides that in such a merger stock may be converted into money. See MGCL Section 3-103. (2) Contrary to plaintiff’s contention, Section 9 of the Articles Supplementary does not prevent the conversion of the preferred shares to cash upon a merger. The court interpreted this provision of the Articles Supplementary to establish a limitation upon the right of preferred stockholders to convert their stock, distinguishing the preferred stock at issue from convertible preferred securities. (3) The court declined to speculate about the possible ramification of Section 7(b) of the Articles Supplementary, related to voting rights, which had not been expressly argued.
For Count II, the court held that the plaintiff had failed to state a claim based on the defendant’s breach of fiduciary duty. The breach of fiduciary duty claim largely relied upon the allegations that defendants’ conduct contravened the Articles Supplementary. However, the court already rejected plaintiff’s contention that the merger violated the Articles Supplementary.
The court briefly discussed plaintiff’s claims for declaratory relief and aiding and abetting for Count III and Count IV, before granting defendant’s motion to dismiss.
The full opinion is available in PDF.