Filed: November 30, 2016Opinion by: Chief Judge Peter B. KrauserHolding: Under Maryland law, a construction surety was not bound by an arbitration clause contained in a subcontractor’s contract with a third party, where, although the contract was ...

Schneider Elec. Bldgs. Critical Sys. v. W. Sur. Co. (Ct. of Special Appeals) and more


Schneider Elec. Bldgs. Critical Sys. v. W. Sur. Co. (Ct. of Special Appeals)

Filed: November 30, 2016
Opinion by: Chief Judge Peter B. Krauser
Holding:  Under Maryland law, a construction surety was not bound by an arbitration clause contained in a subcontractor’s contract with a third party, where, although the contract was incorporated by reference into the bond at issue, the language of the bond did not imply an intent to make the arbitration provision binding on the surety.
Facts:  An electrical contractor (the “Contractor”) engaged a subcontractor (the “Subcontractor”) to perform certain construction work pursuant to a Master Subcontract Agreement (the “Contract”) and a related subcontract (the “Subcontract”).  In accordance with the Subcontract, Subcontractor obtained a performance bond (the “Bond”) from a surety (the “Surety”).  Pursuant to the Bond, the Subcontractor and Surety agreed to be jointly and severally bound to the Contractor for performance of the Subcontract.  The Subcontract was incorporated by reference into the Bond.  In turn, the Subcontract incorporated by reference the Contract, which contained a provision requiring arbitration of disputes between the parties to the Contract (i.e., the Contractor and Subcontractor).
A dispute eventually arose between the Contractor and the Subcontractor, and the Subcontractor ceased performing work under the Subcontract.  The Contractor terminated the Subcontractor, engaged substitute services, and filed a demand for arbitration with the American Arbitration Association, naming the Subcontractor as the sole respondent and seeking damages.  The Contractor later amended the arbitration demand to include the Surety as a named respondent.  In response, the Surety filed an action in the Circuit Court, seeking a stay of arbitration and a declaratory judgment.  The Surety moved for partial summary judgment in the Circuit Court action, asserting that because there was no agreement to arbitrate between the Surety and the Contractor, the Surety was entitled to judgment as a matter of law on its request for a stay of arbitration.  The Circuit Court granted the Surety’s motion, and the Contractor appealed to the Court of Special Appeals.
Analysis:  Maryland adheres to the objective rule of contract interpretation, pursuant to which courts must first “determine from the language of the agreement what a reasonable person in the position of the parties would have meant at the time the agreement was effectuated.”  Hartford Accident and Indem. Co. v. Scarlett Harbor Assocs. Ltd. P’ship, 109 Md. App. 217, 291 (“Scarlett Harbor”), aff’d, 346 Md. 122 (1997); see Nationwide Mut. Ins. Co. v. Regency Furniture, Inc., 183 Md. App. 710, 722 (2009) (“Maryland follows the objective theory of contract interpretation.”).  “Where the contract comprises two or more documents, the documents are to be construed together, harmoniously, so that, to the extent possible, all of the provisions can be given effect.”  Regency Furniture, 183 Md. App. at 722-23 (quoting Rourke v. Amchem Prods., Inc., 384 Md. 329, 354 (2004)).  Further, “a contract should not be interpreted in a manner in which a meaningful part of the agreement is disregarded.”  Scarlett Harbor, 109 Md. App. at 293.
Here, the contract was comprised of three documents—the Bond, the Subcontract, and the Contract.  The Contractor argued that the Surety was bound by the arbitration provision in the Contract because (i) the Bond made the Surety jointly and severally liable with the Subcontractor for “performance” of the Subcontract and Contract; and (ii) the Bond incorporated by reference the Subcontract which incorporated by reference the Contract (and its arbitration provision).
As to the first argument, the Court reviewed the language of the Contract and the Bond to determine the meaning of the term “performance”, and concluded that the term referred “to the performance of the work [the Subcontractor] agreed to complete and not to every contractual provision in the incorporation-by-reference chain.”  As to the second argument, the Court looked to its prior decision in Scarlett Harbor for guidance, which addressed the question of whether a non-signatory surety on a performance bond, which incorporated by reference a construction contract (containing an arbitration clause) between a developer and a subcontractor, could compel the developer to arbitrate its dispute with the surety.  Quoting Scarlett Harbor, the Court held that “‘incorporation of one contract into another contract involving different parties does not automatically transform the incorporated document into an agreement between the parties to the second contract,’ unless there is ‘an indication of a contrary intention’ to do so.”  The Court found no language in the Bond indicating a contrary intent and instead found that the Bond contained a provision expressly requiring disputes to be litigated in Maryland State court.  Accordingly, to give effect to the “express direction that relief must be sought in the courts of this State,” the Court rejected the argument that the Surety was bound by the arbitration provision through incorporation by reference.

The full opinion is available in PDF.


     
 


Yang v. G&C Gulf Inc. (Cir. Ct. Mont. Cnty)

Filed: November 14, 2016

Opinion by: Ronald B. Rubin

Holding:

A putative class of defendant parking lot owners merited certification under Md. Rule 2-231 because it met the necessary requirements under sections (a) and (b) of the rule, given that the parking lot owners executed nearly identical contracts with the Defendant towing company to tow vehicles from their lots without their prior permission and with the discretion to demand up-front payment in exchange for the return of a vehicle, under the same broad grant of authority. Moreover, two named Plaintiffs’ vehicles were towed from the named Defendant lot owner.

Facts:

The original Plaintiff sued the Defendant towing company and its owner alleging that the Defendant towing company (1) engaged in “sweep” or “trespass” towing without obtaining the permission of the lot owner in advance of each tow and (2) improperly asserted a possessory lien on the towed vehicles, essentially holding them for ransom until the vehicle owner paid the towing fees in exchange for the vehicle’s release.

The parties reached a settlement, and the court severed claims against the owner. The court also certified a plaintiffs’ class, consisting of all persons whose vehicles were non-consensually towed by the Defendant towing company from a private parking lot from April 16, 2012, to January 7, 2016, and implicated 24,023 tows.

Plaintiffs then filed a second amended class complaint naming as an additional Defendant an owner of several Montgomery County parking lots who entered into a towing contract with the Defendant towing company and seeking to establish a defendants’ class, consisting of the 500 or more parking lot owners who entered into contracts allowing the Defendant towing company to patrol and “trespass tow” vehicles at will. They claimed that the Defendant towing company towed more than 26,000 vehicles from the lots of those in the putative class. Soon after, Plaintiffs filed another amended class complaint and a motion to add two additional named Plaintiffs who owned cars parking in lots owned by the Defendant lot owner, which was granted.

Analysis:

Certification of a class is governed by Md. Rule 2-231. Proponents must show that a putative class meets the four requirements of section (a) and one of the alternatives under section (b). The Court held, rather summarily, that the putative class met both requirements of sub-section (b)(1), regarding the risk that separate prosecutions would (1) result in inconsistent adjudications with respect to individual members of the class that would establish incompatible standards of conduct for the opponents or (2) result in adjudications of individual members that would be dispositive of the interests of other non-party members, or substantially impair or impede their ability to protect their interests.

The Court also held that the putative class met the requirements of section (a).  The first requirement, that the class is so numerous that joinder of all members is impracticable, was met because at least 573 lot owners entered into standardized, substantially similar written agreements with the Defendant towing company that granted general authority to tow vehicles from their lots. The second requirement, of common questions of law or fact, was met because common questions included: whether the lot owners owed a duty to the Plaintiffs by virtue of the contract; whether the lot owners had a duty to permit the vehicle owners to retake their vehicles without up-front payment; whether a possessory or storage lien and credit card fees were improperly imposed; and the conformity of the towing receipts to applicable laws.

The third requirement, of whether the representative’s claims or defenses are typical of the class, was met because each car was towed from the lot by the Defendant towing company pursuant to a contract with the lot owner. That the contracts are not identical is irrelevant because each contained a grant of authority to “tow at will” without specific, prior authorization of the lot owner. Thus, the claims arise from the same alleged practice or course of conduct by the Defendant towing company, which was expressly authorized by members of the putative class.

The fourth requirement, whether the representative parties will fairly and adequately represent the class interests, was met because the Defendant lot owner rarely specifically authorized a tow, but rather, relied on the Defendant towing company’s discretion and allowed it to require full, up-front payment in exchange for return of a vehicle. The Defendant lot owner's reluctance to represent the class was irrelevant, given his interest and ability in doing so.

The Court then highlighted two special issues with the putative defendant class: the Plaintiffs’ standing to sue and whether the putative defendant class would survive a more rigorous analysis for typicality and commonality, the third and second requirements of section (a), respectively.

The Court examined federal case law interpreting Federal Rule 23 and noted that, generally, a plaintiff representative must possess a claim against each member of the putative class; in other words, every named plaintiff must possess a claim against every putative class defendant in order to be certified.  This is a difficult standard for private parties, and a common regulatory scheme, without more, is typically insufficient.

The Court then cited Master Financial, Inc. v. Crowder, 409 Md. 51 (2009), regarding plaintiffs who obtained home loans from lenders and wanted to sue entities that purchased the loans from the lenders. The Master court posed the question as one of standing or availability of a juridical link, and noted that the purchasers did not purchase the loans of the named plaintiffs, but rather those of unnamed class members. The argument for certification was that by violating the statutory rights of these unnamed members, the purchasers are juridically linked to the named plaintiffs or the other defendants. Ultimately, the Mastercourt did not adopt a juridical link theory.

The Court factually distinguished Master from this case. The Court noted that the plaintiffs in Master, unlike Plaintiffs here, were not yet certified as a class. Moreover, the Plaintiffs, whose cars were towed by the Defendant towing company and two named Plaintiffs’ cars were towed from a lot owned and operated by the Defendant lot owner. The Plaintiffs were certified before the Defendant lot owner was added as a defendant. Unlike the purchasers in Master, the Defendant lot owner in this case is well-representative of his class. He has every incentive to defend against the claims that are legally and factually identical to those of the putative class members, and hinge on the nearly-identical contracts with the Defendant towing company. The members have a right to intervene if they are dissatisfied with the Defendant lot owner’s representation.  

In support, the Court cited a Massachusetts opinion holding that plaintiffs who sued a drug store and the pharmaceutical manufacturers whom the plaintiffs had not dealt with directly were entitled to class certification because, as the contracts between the drug store and the pharmaceuticals were largely identical and the administration of the program contracted-for was substantially similar across the board, there was a sufficient link among the defendants.  

The Court also cited a Missouri case stating that class certification is logically antecedent to questions of standing, and that once a class is properly certified, standing requirements must be assessed with reference to the class as a whole, not merely the named plaintiffs.

The Court concluded that the contracts and common regulatory scheme created a juridical link; the link is consistent with Master; and the Plaintiff class has standing to sue the Defendant class.


This opinion is available by PDF.
     
 


Boudreaux v. MICROS Systems, Inc. (Ct. of Special Appeals, Unreported)

Filed: August 19, 2016

Opinion by: Judge Wright, Jr.

Holding:  The mere statement of the existence of an offer, which is in excess of an accepted offer in a strategic transaction, is not sufficient to constitute a breach of a fiduciary duty to maximize value when the offer is subject to variability and is in close proximity to the price per share in the accepted offer.

Facts:  Target, a Maryland corporation, discussed a strategic transaction with three companies at various points over several months – Party A, Party B and the acquirer.  Target declined Party A’s proposal, which demonstrated an interest in acquiring target’s common stock for $58.00 per share.  On May 22, 2014, Party B entered into a non-disclosure agreement with target.  After three meetings of target’s board of directors on June 2, 2014, June 4, 2014 and June 5, 2014, target entered into exclusive negotiations with the acquirer.  During the exclusive negotiations, Bloomberg published a news article speculating that target and acquirer were nearing a possible transaction.  The price of target’s common stock rose from $57.71 on June 16, 2014 to $66.33 on June 17, 2014.  Also on June 17, 2014, Party B contacted target noting the Bloomberg article and expressed further interest in a potential transaction.  Party B later submitted a non-binding indication of interest to acquire target in an all-cash transaction at a price range of $67.00 to $70.00 per share, subject to a number of assumptions and contingencies.

Target was acquired by acquirer in a $5.3 billion all-cash tender offer, at a purchase price of $68.00 per share, followed by a short-form merger.  Certain stockholders filed complaints against target and its board of directors alleging the price and the process used to negotiate that price were unfair, breach of fiduciary duties, including value maximization duties, and aiding and abetting such breaches.  The circuit court granted defendant’s motion to dismiss.

Analysis:  When parties assert that the selling price of a company is inadequate, courts require a “showing of lack of diligence, failure to exercise judgment, lack of good faith or the existence of such conflicting interests…as to raise doubts of the ability of the trustee to live up to the duty of loyalty he owes to the beneficiaries.”  Madden v. Mercantile (27 Md. App. 17 (1975)).  Maryland courts have recognized that fair value is a variable sum, dependent on a multitude of factors.  “A price of [the stock] cannot be determined unreasonable ‘unless falsified by something more tangible than the unverified book value of the corporation, especially when those in control, with their intimate knowledge of the present and prospective affairs of the corporation, were willing to part with that control and sell their stock at the price offered.’”

Plaintiffs pled that there was a tentative offer from Party B that, at best, proposed $70.00 per share.  The Court provided:  “[s]tating that an offer of such nature existed is not nearly sufficient to constitute breach of fiduciary duty, especially considering its variability and proximity” to the agreed price per share.  The Court noted that several statements made by the plaintiffs subverted the stated $70.00 per share price and therefore made it speculative.  The Court further noted that plaintiffs could not point to a deal protection device that prevented another company from bidding and stated that, therefore, the target did not favor the acquirer.  The Court dismissed the breach of duties claim. 

The requirements for stating a claim for aiding and abetting a breach of a fiduciary duty are (1) existence of a fiduciary relationship, (2) breach of a duty owed by the fiduciary to the beneficiary and (3) harm resulting from the breach.  Underlying tortious activity must exist for the aider and abettor to be held liable.  Plaintiffs argued that the termination fees and non-solicit provision constituted an aiding and abetting claim “strong enough to withstand a motion to dismiss.”  The Court dismissed the claim because it failed the second prong of the test.

The opinion is available in PDF


This is an unreported opinion.  See Md. Rule 1-104.
     
 


Rullan v. Goden (U.S.D.C.)

Filed: March 24, 2016

Opinion by: Catherine C. Blake, District Judge


Holdings:  (1) Personal jurisdiction over an out-of-state entity can be shown when a related entity transacts business in Maryland and the out-of-state entity does not maintain separate books and records, accounting procedures and directors’ meetings from the related entity.  

(2) Maryland may be considered an out-of-state entity’s principal place of business if that entity lists a Maryland address on its tax forms and stores business records primarily at its Maryland location.

(3) When the sole shareholders and directors of business entities sign an agreement that addressed the ownership of those entities, the entities are bound by that agreement.

(4) An oral employment contract that lasts for one year is not enforceable under Florida law if it is not reduced to writing and signed by the party against whom it is sought to be enforced.  When a contract contemplates a one-year employment relationship, performance is not deemed complete when a superseding agreement is formed within that one-year period. 

(5) A contract is not void as contrary to public policy unless its illegality is clear and certain.

(6) Under West Virginia law, a contract may be enforceable when the language of an agreement indicates that the parties fully intend to be bound, but they contemplate a more elaborate formalization of the agreement.  The formalization of the agreement is not a condition precedent to the agreement unless the parties expressly indicate as much.

(7) Judicial dissolution may be proper when there is illegal, oppressive or fraudulent action by majority shareholders with respect to minority shareholders.  Under Maryland law, conduct is oppressive when it substantially defeats the reasonable expectations held by minority shareholders in committing their capital to the enterprise. 

(8) Financial accounting is an available remedy when shareholder oppression is present. 

Facts:  Daughter and Father were each 50% owners of Company 1, based in West Virginia, and Company 2, based in Maryland, which owned and managed a West Virginia summer camp (the “Camp”).  As Father contemplated leaving the summer camp business, he and Daughter wanted to add a European partner to help Daughter run the Camp.  Father and Daughter believed that Plaintiff, a Spanish national, could help with the Camp’s revenue by recruiting European children from wealthy families.  Plaintiff had attended the Camp as a camper and a counselor for about 20 years.

On December 7, 2010, Father, Daughter and Plaintiff met in Florida to discuss Plaintiff’s possible involvement with the camp.  They discussed the Camp’s debt, liabilities and size, but Father and Daughter did not correct Plaintiff when he presented inaccurate figures.  According to Plaintiff, the parties agreed that Plaintiff would work for $72,000 annually to recruit European campers, and if this worked out well, Father would sell Plaintiff his 50% share of the Camp.  Daughter could also make Plaintiff her full partner at any time during this first year.  Father, on the other hand, insists that he told Plaintiff that he would need to work successfully with Daughter for one year before he would sell his interest to Plaintiff.  The meeting minutes indicated that Plaintiff would work as an employee for at least one year, after which there would be an evaluation and an opportunity for Plaintiff to obtain shares of the company “if everything goes well.”  However, in the course of working with the Camp, Daughter soon began referring to Plaintiff as her “partner.”  In January 2011, Plaintiff and Daughter formed a new business entity, Company 3, to recruit more campers from Europe.

In January 2011, Father executed a promissory note naming him and Company 2 as jointly responsible for a $350,000 loan that had apparently been made to him in 2009 and which he had not disclosed to Plaintiff.  Plaintiff was also unaware of other issues, such as lawsuits against the Camp, Father and Daughter’s commingling of personal and Camp funds, and the true acreage of the Camp.
   
To secure a visa for Plaintiff to work in the United States, Plaintiff and Daughter were each advised to contribute $55,000 to Company 3.  Plaintiff invested $55,000 of his personal funds in Company 3, but Daughter contributed nothing.  Still, Plaintiff and Daughter each received half Company 3's stock shares.  Daughter also transferred the $55,000 Plaintiff had invested in Company 3 to Company 2, explaining to Plaintiff that the money was being borrowed for Camp expenses.  Daughter told Plaintiff that the $55,000 would be credited toward Plaintiff’s eventual purchase of the Camp from Father.

During the summer of 2011, Plaintiff worked at the Camp.  Father and Daughter were displeased with Plaintiff’s work.  Plaintiff also learned for the first time that two different companies, Company 1 and Company 2 owned the Camp, and that the Camp struggled to pay its bills on time.

Plaintiff, Father and Daughter met in June 2011 to discuss committing the partnership agreement between Plaintiff and Daughter to writing.  Father and Daughter continued to refer to Plaintiff as Daughter’s “full partner in the Camp” and assured Plaintiff that the Camp was doing well financially, though they did not disclose the extent of the Camp’s liabilities or cash-flow related challenges.  In August 2011, Daughter asked Plaintiff to lend $50,000 to the Camp to cover a cash-flow shortage.  Plaintiff did so, thereby depleting his life savings.
 
In late August 2011, the three met again to discuss various issues concerning the partnership.  They drafted and all signed a document called Partnership Stock Agreement (“PSA”) at that time.  Nevertheless, Father subsequently contended that this was a letter of intent contemplating a formal agreement in the future, and that he still needed to evaluate Plaintiff’s involvement, particularly given that the one-year vetting period had not been completed and he was not happy with Plaintiff’s performance during the summer.
   
The August 24, 2011 PSA included several terms.  Plaintiff was to pay $50,000 per year for ten years to purchase 50% stock in Company 1 and Company 2.  $50,000 of the %55,000 that Plaintiff invested in Company 3 was to be credited toward his stock purchase.  The PSA provided other terms, such as agreement as to the manner in which to invest profits and limits on expenditures requiring consent from the other partner.  The PSA's final term stated that “[a]fter this agreement, a due diligence of the company and the additional legal papers required for the transaction will be made.”  No stock certificates or other legal documents were executed at that time, but when Plaintiff encountered other legal troubles, Daughter faxed documentation of Plaintiff’s investment and part ownership in the Camp from the Camp’s Maryland office. 

Plaintiff’s relationship with Father and Daughter deteriorated in late 2011.  Plaintiff learned that the Camp’s appraised value was $2.9 million instead of the $6 million he was led to believe it was worth.  Daughter prevented Plaintiff from having input on the business plan and accessing the financial records.  Plaintiff also learned that Father and Daughter used Camp funds to pay for their personal expenses and commingled funds.  Nevertheless, Daughter asked Plaintiff to contribute more money and bring in more campers.  Meanwhile, Father’s wife had died, allowing him to become more actively involved in the Camp’s affairs both with respect to his time and access to additional capital.  Father expressed disappointment with Plaintiff’s work and inability to assume more of the debt, and eventually banned him from being present or involved in the Camp.  Plaintiff sued Father, Daughter, Company 1, Company 2 and Company 3 (collectively, “Defendants”), alleging breach of contract and other causes of action.  Defendants moved to dismiss, which the court treated as a motion for summary judgment, and Plaintiff filed a cross-motion for summary judgment. 

Analysis:  Company 1, which was organized and ostensibly based in West Virginia, moved to dismiss, arguing lack of personal jurisdiction in Maryland.  Maryland’s Code, Courts and Judicial Proceedings § 6-103(b)(1) provides that a court may exercise jurisdiction over a defendant “who directly or by an agent . . . [t]ransacts any business or performs any character of work or service in the State.”  By showing that Daughter faxed Plaintiff documents indicating his stock ownership from the Maryland office and conducted certain meetings and operations there, Plaintiff made a prima facie showing of personal jurisdiction.  Moreover, although generally the contacts of one entity are not imputed to its affiliate, an exception is found when the affiliates fail to maintain separate books and records, accounting procedures and directors’ meetings.  Because there was significant overlap between the books and records of Company 1 and Company 2, a Maryland company, it was not unreasonable to impute Company 2’s Maryland contacts to Company 1.  Finally, the exercise of jurisdiction was “constitutionally reasonable” because it wasn’t “so gravely difficult and inconvenient as to place the defendant at a severe disadvantage in comparison to his opponent.”  CFA Inst. V. Inst. of Chartered Fin. Analysts of India, 551 F.3d 285, 296 (4th Cir. 2009).  For example, Daughter, a half-owner and officer of Company 1 was a resident of Maryland, and Company 1 had retained the same lawyers as the other defendants.  In fact, because Company 1’s tax forms listed a Maryland address, and the business records were stored in the Maryland office except when Camp was in session during the summer, the evidence supported a finding that Company 1’s principal place of business was in Maryland. 

The court addressed four of the Defendants’ arguments relating to breach of contract.  First, Company 1 and Company 2 argued that they were not bound by the PSA because Father and Daughter signed as individuals, not on behalf of the companies.  Second, Defendants argued that the statute of frauds barred enforcement of the December 2010 employment agreement.  Third, they argued that the employment agreement was illegal or against public policy.  Fourth, they argued that the alleged agreement contained conditions precedent and therefore was not binding.

The court summarily dismissed the first argument by saying that because the subject of the PSA was the ownership of Company 1 and Company 2, and because Father and Daughter were the only two shareholders of both companies, it was clear that Father and Daughter signed on behalf of Company 1 and Company 2.

The court agreed with the second argument concerning the statute of frauds by interpreting Florida law.  The oral employment agreement arose from a meeting of Plaintiff, Father and Daughter in Florida, so Florida’s statute of frauds applied.  Florida law requires that any agreement that cannot be fully performed within one year of creation to be reduced to writing and signed.  The statute of frauds barred enforcement of the December 2010 employment agreement, which completed Plaintiff’s employment for one year beginning in January 2011.  Moreover, the court rejected Plaintiff’s argument that the employment agreement had been fully performed in light of the August 2011 PSA, because Daughter had effectively made him a partner.  Because Plaintiff’s own complaint referred to the oral agreement as “an oral agreement that was to last one year,” the court granted summary judgment for Defendants on the breach of contract claim. 

The court rejected the third argument regarding terms contrary to public policy.  First, the court observed that contracts should not be held unenforceable for public policy grounds unless their illegality is clear and certain.  The court found no merit in Defendants’ argument that it would have been illegal for a partnership to replace a corporation, as Plaintiff could have been both a partner and a shareholder in Company 1 and Company 2.  The court also rejected Defendants’ argument that the contract was unenforceable because a “nonresident alien” may not own stock in an S corporation pursuant to 26 U.S.C. § 1361(b)(1)(C).  A nonresident alien’s purchase of stock in an S corporation is not illegal, but rather it causes the entity to lose its tax status as an S corporation.  Finally, the court rejected Defendants’ argument that the PSA was illegal and unenforceable because Plaintiff’s E-2 visa authorized him to work in the United States for Company 3, not Company 2 or Company 1.  This argument failed because the PSA did not call for Plaintiff to work in the United States, but rather he was to work in Europe recruiting campers, and the agreement did not call for the violation of the terms of his visa. 

As for the conditions precedent argument, the court found that summary judgment was improper on that ground.  Because the PSA was written and signed in West Virginia, the court applied West Virginia law on the existence of a contract.  The court noted that nothing on the face of the PSA indicated that it was a letter of intent and not a contract.  Moreover, even if the PSA were construed as a “preliminary agreement,” it would still be enforceable.  Under West Virginia law, there are two types of binding preliminary agreements, called Type I and Type II.  Type I is a complete agreement in which the parties fully intend to be bound, but they contemplate a more elaborate formalization of the agreement.  See Burbach v. Broad Co. of Delaware v. Elkins Radio Corp., 278 F.3d 401, 407 (4th Cir. 2002).  By contrast, Type II agreements do not fully commit the parties to the ultimate contractual objective, but they commit the parties to negotiate the open terms in good faith within an agreed-upon framework.  See id. at 408.  The court found that the PSA was a Type I preliminary agreement, as its language, “[a]fter this agreement, a due diligence of the company and the additional legal papers required for the transaction will be made,” states that the agreement only needed to be formalized.  Because the parties did not express their intent for the formalization to be a condition precedent, the court would not construe it as such. 

Summary judgment was denied with respect to Plaintiff’s shareholder oppression claims.  The claim against Company 1 arose under West Virginia law, and the claim against Company 2 arose under Maryland law.  Both states’ laws allow for the dissolution of a corporation when the directors or controlling parties act in a manner that is illegal, oppressive or fraudulent.  The court observed that majority shareholders of a corporation have a fiduciary duty to the minority shareholders, which requires the former to exercise good faith and fair dealing toward the latter.  In West Virginia, when a majority shareholder acts to “freeze or squeeze out” a minority shareholder from deriving any benefit of his investment without a legitimate business purpose, oppressive conduct may be found.  In Maryland, oppression is conduct that “substantially defeats the reasonable expectations held by minority shareholders in committing their capital to the particular enterprise.”  Bontempo v. Lare, 119 A.3d 791, 804 (Md. 2015).  The court rejected Defendants’ argument that Plaintiff was not a shareholder of Company 1 or Company 2, because Daughter provided Plaintiff with documentation that he had contributed capital and was a 10% shareholder of both companies.  Summary judgment on this claim was therefore improper. 

The court further observed that both West Virginia and Maryland law provide for accounting as a form of relief against shareholder oppression.  Because there was evidence that Plaintiff was a shareholder of Company 1 and Company 2, summary judgment on the accounting claim was denied. 

The full opinion is available in PDF.





     
 

Kunda v. Morse (Ct. of Spec. Appeals)

Filed: August 31, 2016

Opinion By: Reed

Holding: The procedural rule requiring a plaintiff to plead their damages with particularity, having been amended during the course of the litigation, does not require the plaintiff awarded more damages than pled to accept the lesser amount to avoid reversal on appeal.

Facts: The parties had entered into a purchase agreement for a business operated by the Defendant, Kunda, requiring the Plaintiffs to pay a total of $846,950, with a portion bank-financed and the remainder owner-financed.  After entering into the agreement, the parties amended the agreement to alter the payment schedule.  The Plaintiffs paid $200,000 to Kunda, but then failed to timely make certain payments due to Kunda, but not before the period to cure the failure had run.  Kunda, however, re-entered the property and evicted the Plaintiffs, and essentially took back over operations of the store.  The Plaintiffs responded with a lawsuit, alleging breach of contract, and seeking damages in the amount of $102,600.

At trial, the Plaintiffs won a verdict of $200,000, but did not amend their complaint to conform to the verdict.  The defendant did not file a motion to reduce the judgment to the amount of the complaint, but instead appealed the enrolled judgment.

Analysis: The Court first reviewed the contract claims of the parties.  The Court determined that the trial court did not err in finding that Kunda, rather than the Plaintiffs, was in breach of the agreement among the parties, based on the factual findings of the trial court that the Plaintiffs still had time to cure the failure to make timely payments, and therefore Kunda breached by evicting them and taking over the operation of the business.

The Court then had to address the other issue raised by Kunda, namely that the judgment entered in the Plaintiffs' favor exceeded the amount demanded in their Complaint.  The Complaint's damage amount was calculated based on the amount of inventory alleged to have been wrongfully taken by Kunda at the eviction, however, the judgment entered in the Plaintiffs' favor was based on the Plaintiffs' demand that Kunda refund the $200,000 previously paid by the Plaintiffs prior to the breach of the contract.

At the time that the Plaintiffs filed their action, the predecessor rule for pleading damages was in force.  Prior Rule 2-305 provided that a plaintiff was required to demand specific damages, in order to put a defendant on notice of the amount of the claim.  In the event that the amount of damages proven at trial did not correspond to the complaint, a plaintiff was required to amend their complaint promptly after judgment was entered on the docket.  A defendant was also permitted to move to reduce a judgment to the amount in the complaint if a plaintiff failed to properly amend a complaint to conform with a higher award.

However, the Maryland Rules were amended in 2012.  Among the changes was a change to Rule 2-305, which provided that a plaintiff whose damages exceeded $75,000 would simply so indicate, and if less, plead the specific amount for purposes of determining appropriate state trial court jurisdiction.  The issue for the Court was whether the new or prior Rule applied in the present case, as judgment in the case was entered in 2014.  The Court concluded that parties have no vested interest in procedural rules, and that justice was served in applying the current pleading requirement under Rule 2-305.

Therefore, because neither party had made post-judgment motions to adjust the complaint or judgment, the Court affirmed the judgment amount entered by the trial court, reasoning that the amount of damages was in fact supported by evidence adduced at trial, irrespective of the amount of damages specified in the Complaint.

The full opinion is available in PDF.

     
 

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