Filed: April 21, 2016
Opinion by: Ronald B. Rubin
Holdings: (1) Sole managing member of a special purpose entity can establish privity through control of litigation sufficient to prevent escape from application of doctrines of res judicata or collateral estoppel to his person relative to the special purpose entity; (2) Guarantor of a satisfied loan remains personally liable for attorneys’ fees under a fee-shifting provision where Borrowers became purposefully insolvent; (3) Merger Doctrine does not bar Plaintiff from accrual of additional attorneys’ fees where Borrower was released from liability while claims against Guarantor remain outstanding.
Facts: Plaintiff judgment creditors (“Creditors”) seek to collect over $2.7 million in legal fees and costs awarded and reduced to final judgment from individual guarantor of a commercial real estate loan.
In the underlying 2004 transaction, affiliated real estate entities (“Borrowers”) agreed to borrow $35 million to improve an apartment complex. In the transaction’s guaranty, the president and sole managing member of the real estate entities (“Guarantor”) unconditionally guaranteed the payment of every recourse obligation without regard to release or discharge of the Borrowers from their liability under the loan documents.
Creditors securitized the loan in 2006, transferred it into a collateralized debt obligation (“CDO”), and made the requisite SEC filings memorializing the transaction.
After several loan modifications not relevant to the instant action, Creditors promised in 2010 to grant Borrowers a right of first refusal if it intended to sell the entire loan, with broad release and indemnification provisions in case of such an exit. In consideration, Borrowers contributed $4.2 million and agreed to numerous additional exit conditions. Guarantor signed the modification on behalf of all relevant parties and in his personal capacity as Guarantor.
Soon after, Creditors transacted with another commercial lender (“Servicer”) to sell a subordinated equity interest in the CDO and delegate servicing rights to the loan. Servicer timely made SEC filings memorializing its interest in that transaction.
Borrowers, mistakenly interpreting this as a sale in violation of their bargained-for right of first refusal, initially attempted to bargain for a discounted loan payoff. Rebuffed by Creditors, Borrowers thereafter sold the apartment complex, paid the loan in full, and duly paid their investors a distribution of approximately $13M. Guarantor himself pocketed at least $1M. The residue of $1M was transferred to Borrowers and earmarked for the upcoming litigation.
Litigation proved to be extensive. Borrowers sued both Creditors and Servicer in the Circuit Court for Montgomery County, seeking $25M in damages for Creditors’ breach of contract. In that first action, the court granted summary judgment for Creditors, finding that the SEC filings and contract documents clearly demonstrated that Servicer had not purchased Borrowers’ loan. The court also granted Creditors’ counterclaim for attorneys’ fees based on the loan modification’s release and fee-shifting provisions. Borrowers appealed.
The Court of Special Appeals affirmed on all counts except for the amount of attorneys’ fees and remanded for an evidentiary hearing. The Circuit Court duly complied, issuing an opinion awarding $2.7 million in fees and costs. This award was affirmed following a second appeal where Borrowers attempted to re-litigate liability rulings lost at the trial level and affirmed on appeal. Borrowers thereafter refused to pay or bond the judgment.
Analysis: In the instant suit, Plaintiff Creditors seek to enforce the judgment against Defendant, who was personal Guarantor for the 2004 $35M loan. Because Borrowers liquidated and distributed all assets in 2011, and consequently exhausted the remaining $1M in earmarked legal funds, Plaintiff Creditors maintained that the legal fee judgment constituted a recourse obligation under the loan agreement giving rise to personal liability.
As the extensive appellate history involved summary judgment motions affirmed on appeal, only narrow issues remained before the court:
- Whether Plaintiffs had standing to enforce the guaranty
- Whether merger doctrine extinguished Guarantor’s obligations to pay additional attorneys’ fees
- Whether the judgment constituted a Recourse Obligation under the guaranty
- Whether Borrowers were insolvent such that Guarantor became liable
- Whether Creditors are entitled to additional attorney fees incurred as of the second appeal
As to the first, the court found no cogent basis for Guarantor to re-litigate the factual issue of plaintiffs’ standing.
Both before this court and above, Guarantor’s prior challenges to standing were rejected.
In each prior instance, the courts made clear the identities of and relationships between the parties.
Guarantor personally benefited from the real estate transaction, participated in and planned the litigation, and possessed interests perfectly in alignment with that of Borrowers.
, the court indicated that strict privity was not always a condition requisite to apply res judicata or collateral estoppel, but instead privity could be established through control:
…“parties” includes all persons who have a direct interest in the subject matter of the suit, and have a right to control the proceedings, make defense, examine the witnesses, and appeal if an appeal lies. Where persons…are so far represented by another that their interests receive actual and efficient protection, any judgment recovered therein is conclusive upon them to the same extent as if they had been formal parties.” Ugast v. LaFontaine, 189 Md. 227 (1947).
Accordingly, the court so found that fairness, judicial economy, and common sense each militated against Guarantor’s third attempt to re-litigate standing.
As to the second, the court instructed that only after all appeal rights are exhausted does a judgment become final and right to attorneys’ fees become extinguished. With the underlying litigation currently under appeal, attorneys’ fees would continue to accrue. And in any event, the court pointed to Guarantor’s personalobligation under the guaranty which was separate and apart from any release from liability applied to Borrowers.
As to the third, Guarantor’s primary argument was that the loan documents evidenced intent to consider amounts due as non-recourse obligations with narrowly drawn exceptions for recourse debt. Applying objective rules of contract interpretation, the court found no ambiguity: considered as a whole and afforded ordinary meaning, the commercially reasonable interpretation of the guaranty indicated Borrowers were subject to a recourse obligation on any attorneys’ fees, and the Guarantor was to assure Borrower’s performance if they sued and lost. Because this right was specifically bargained for and granted under the relevant loan modification, the court found Guarantor’s requested interpretation to be commercially unreasonable.
As to the fourth, the court determined that Borrowers had purposefully created a judgment-proof entity to pursue claims by setting aside only enough money to fund their side of the underlying case. With all funds withdrawn in pursuit of their own economic interests, Borrowers remained unable to pay debts in the ordinary course and were therefore insolvent as a matter of law. Accordingly, the court found no dispute of material fact that Borrowers breached contract by becoming insolvent and unable to pay attorney’s fees awarded in the underlying case, and therefore ascribed Plaintiff Creditors’ loss to Guarantor.
Finally as to the fifth, the court was persuaded that Plaintiff Creditors presented sufficient evidence to support an additional award with detailed, accurate, and informative billing statements evidencing reasonable rates, appropriate assignment of work, aggressive litigation, and a body of work reasonable in relation to the complex commercial real estate litigation involved.
In so finding, the court granted Plaintiff Creditors’ motion for summary judgment, imposing an additional award of attorneys’ fees for a total judgment of $3.14M against Guarantor.
The full opinion is available in PDF
Filed: January 29, 2016
Opinion by: Catherine Blake
Holding: Under Maryland’s "economic loss rule" courts have limited remedies if the loss is purely economic and the parties were engaged in arms-length commercial bargaining.
Facts: Plaintiff operated a restaurant that allowed customers to pay with American Express Credit Cards. Plaintiff alleged that Defendant, a merchant payment card processor, mixed up the customer identification number and this mistake resulted in $349,395.14 being routed incorrectly to John Doe/ ABC Co. Plaintiff sued Defendant, American Express, and John Doe/ABC Co. to recover payments made by customer’s credit cards.
Plaintiff sued Defendant for negligence and breach of contract. Defendant filed a motion to dismiss for failure to state a claim. Parties agreed, per the terms of the contract, to apply NY law for the breach claim. The Court applied the Erie doctrine, choice of law, and outcome determinative test. Maryland law controlled the negligence claim and NY law controlled the breach of contract claim.
Analysis: The Court relied on Jacques v. First Nat'l Bank of Md., to determine if a duty exists. The Jacques test balances the nature of the harm that is likely to result from a failure to exercise due care and the nature of the relationship between the parties. When the failure to exercise due care creates only a risk of economic loss courts generally require an intimate nexus between the parties to impose tort liability. Plaintiff argued that, like in Jacques, it had a special relationship with Defendant which trumps the economic loss rule.
A special relationship exists when: (i) the business is affected with the public interest; (ii) the plaintiff is an individual consumer who is particularly vulnerable and dependent upon the other parties' exercise of due care; (iii) there is a disparity in strength of bargaining position; (iv) and one party more sophisticated than the other.
The Court disagreed. Specifically, it distinguished this matter from Jacques in two ways. First, Defendant in this matter is a merchant payment card processor, not a bank. Second, and more importantly, Jacques centered upon the fiduciary relationship a bank has to the individual clients. The Defendant conducts a sophisticated commercial enterprise with the same bargaining power as the Plaintiff. The Court ruled that a credit card payment processor does not have the same fiduciary relationship to a vendor that a bank has to individual consumers.
The Court determined that the economic loss doctrine applies for the negligence claim and granted Defendant’s motion to dismiss the negligence claim.
The full opinion is available in PDF.
Filed: April 26, 2016
Opinion By: Adkins
Holding: The litigation privilege in Maryland extends to breach of a non-disparagement contract clause arising out of statements made by the party's counsel and witnesses in a judicial proceeding, and there is a rebuttal presumption that such privilege was not waived when a party enters into a contract that contains a non-disparagement clause.
Facts: The City of Salisbury entered into a contract for an $80 million upgrade of its wastewater sewage treatment plant with O'Brien & Gere Engineers, Inc. ("OBG") and Construction Dynamics Group ("CDG"). The City believed it had not received the benefit of its bargain and filed a lawsuit against OBG and CDG, which subsequently resulted in a settlement agreement among between OBG and the City. The settlement included a non-disparagement clause where both parties promised to not making disparaging statements concerning the wastewater sewage treatment project.
The City subsequently pursued litigation (ultimately favorable to the City) against CDG concerning the wastewater sewage treatment project. During opening statements of the City, counsel for the City argued that CDG was liable to the City for failing to advise the City as to design failures of the project that were the result of errors by OBG. In addition, the City put on witness testimony during the CDG trial concerning OBG's design failures for the project. OBG then filed a lawsuit against the City for breach of the settlement agreement's non-disparagement clause, which was subsequently dismissed by the trial court for a failure to state a claim as a result of the litigation privilege, which was affirmed by the Court of Special Appeals and ultimately by the Court of Appeals.
Analysis: Maryland recognizes a litigation privilege for statements made during litigation. Historically, this privilege was recognized as an absolute one as to defamation and other tort actions because of Maryland's strong public policy in favor of the unfettered administration of justice, which in part relies on witnesses speaking truthfully and counsel advocating zealously for their clients. Adams v. Peck, 288 Md. 1 (1980). The Court extends this same absolute privilege to a breach of contract claim involving a non-disparagement clause in a settlement agreement on the grounds that the same public policy considerations in a tort case - free expression in the court room by witnesses and counsel - apply with equal force in a breach of contract claim arising out of a non-disparagement clause.
However, the Court next addresses the question of whether the City waived this immunity by entering into a settlement agreement that contained a non-disparagement clause. The Court was persuaded that it is possible for a party to waive this immunity, but as a matter of law, there is a rebuttal presumption in settlement agreements that such immunity is not waived. The Court reasoned that this presumption properly balances the strong public policy in favor of parties and counsel speaking freely in litigation with the strong public policy in Maryland favoring settlement agreements. The Court held that in this instance, the presumption of non-waiver was not rebutted by OBG, leaving open the possibility that such a waiver in a contract is possible in another case.
The Court arrived at this conclusion concerning the presumption by applying well-known contract interpretations principles, starting with the definition of waiver as the intentional relinquishment of a known right, and requiring the intent to waive a right by express word or act, or omission to speak out. Smith v. State, 394 Md. 184, 201 (2006); see Harrison v. State, 276 Md. 122, 137 (1975) (both Smith and Harrison involve waiver of the attorney-client privilege).
The Court then examined the plain language of the non-disparagement clause in the settlement agreement, and found that the City had not expressly waived its right to disparage OBG in the pending lawsuit against CDG. Moreover, the settlement agreement itself was made while the City's lawsuit against CDG was pending, with OBG's express knowledge that its role would be a part of the City's litigation against CDG, yet OBG failed to include an express waiver of the City's immunity as a part of the settlement agreement's non-disparagement clause. As a result, the Court concluded that the presumption the City had not waived its litigation immunity was not rebutted by the settlement agreement's plain language and context.
The full opinion is available in PDF.
Filed: March 22, 2016
Opinion by Michael D. Mason
Neither tortfeasor is entitled indemnification by the other in a case where they are concurrent or joint tortfeasors and where each tortfeasor owes a separate duty to the same third party, but there is no legal relationship between the tortfeasors.
Parsons Brinkcerhoff, Inc. (“PB”) and Foulger-Pratt Contracting, LLC (“FPC”) were hired by Montgomery County (the “County”) and Washington Metropolitan Area Transit Authority (“WMATA”) to design and supervise the construction of the Silver Spring Transit Center. FPC hired Facchina Construction Company, Inc. (“Facchina”) as the primary concrete subcontractor for the project. The County and WMATA filed suit against PB and FPC, among others, alleging injuries suffered as a result of negligence in the design and construction of the center. The majority of complaints related to concrete work; thus PB filed a cross-claim against Facchina for indemnity.
Because there was no legal relationship between PB and Facchina, the court dismissed PB’s cross-claim against Facchina, finding each party owed a separate legal duty to the County and WMATA. The court, citing the Court of Appeals in Franklin v. Morrison
, 350 Md. 144, 162 (1998), stated that “[i]n the case of concurrent
tortfeasors, having no legal relationship to one another
, each of them owing the same duty to the injured party, and involved in an accident in which the injury occurs…no right of indemnity exists on behalf of either against the other; in such a case there is only a common liability and not a primary and secondary one, even though one may have been much more negligent than the other” (emphasis added by the court). Conversely, the court reasoned that a concurrent or joint tortfeasor’s right to indemnity from the other tortfeasor results from the obligations between the tortfeasoers and not from the duty each tortfeasor owes to the injured party. The court, quoting Board v. RTKL Associates
, 80 Md. App. 45, 55-56 (1989) followed the reasoning that, “Indemnity requires that, where one of the wrongdoers is primarily liable, that wrongdoer must bear the whole loss. The joint tortfeasoer must have had some sort of relationship prior to the tort
which justified the claim for indemnity.” (emphasis added by the court).
The full opinion is available in PDF.
The court acknowledged it was possibly that the negligence of PB was minor in comparison to the negligence of Facchina, but that the difference in degree would not justify a claim for indemnity. Any negligence by PB was active, not passive, and therefore PB is not entitled to indemnity by Facchina.
Filed: February 24, 2016
Opinion by: Andrea M. Leahy
A court may consider the purpose of an asset sale and the adequacy of consideration as factors in the analysis of whether the “mere continuation” exception to the rule against successor liability should apply.
Plaintiff is the sole owner of a small lumber distribution business (“Plaintiff LLC;” “Plaintiff” shall refer to Plaintiff in his individual capacity). Until 2010, Plaintiff LLC also manufactured roof trusses and other engineered wood products (“EWP”). Defendant is a lumber retailer who was a customer of Plaintiff LLC.
Plaintiff LLC and Defendant negotiated a partnership for their mutual benefit. Defendant was to acquire assets from Plaintiff LLC, combine them with its own, and form a new LLC (“Predecessor”). Defendant, through its wholly-owned subsidiary (“Subsidiary”), would also contribute money to Predecessor. Subsidiary would own the majority interest in Predecessor, and Plaintiff would be an employee.
The parties agreed that Plaintiff would be employed for two years following the asset purchase in March 2010. Plaintiff was to work part-time and be compensated $10,000 per month over two years ($240,000 in total). Plaintiff’s responsibilities included integration of the roof truss and EWP businesses, sales and marketing. Plaintiff was also to supply Predecessor with lumber from Plaintiff LLC. The agreement provided that if Plaintiff was terminated by Predecessor “without cause,” he would still be owed the $10,000 monthly salary; however if he was terminated “for cause,” neither Predecessor nor Defendant would be obligated to pay the remaining salary.
Defendant also agreed to purchase a number of assets from Plaintiff LLC, including equipment, inventory, intellectual property and customer records in exchange for $139,570 and a 7.5% membership interest in Predecessor. Defendant provided employees for “back office” operations such as hiring, IT and accounting, while Plaintiff managed Predecessor’s sales force and occasionally referred to himself as “President” of Predecessor. Per Predecessor’s Operating Agreement, Subsidiary had authority over Predecessor’s managers, which included Plaintiff.
Predecessor struggled after its formation. In October 2010, Plaintiff’s salary was cut by $4,670 per month. Subsidiary lent Predecessor $425,000 in March 2011, but Predecessor was out of cash by the end of May and could not secure another loan. In May, Defendant began absorbing accounting, administrative and labor costs. Predecessor’s managers considered bankruptcy, but Plaintiff was strongly opposed because Predecessor owed $300,000 to Plaintiff LLC for its lumber supply.
Late in May 2011, it was determined that Plaintiff was no longer employed with Predecessor, although there is disagreement between the parties as to whether Plaintiff voluntarily resigned or was fired. Plaintiff continued to act as a commissioned salesman for Predecessor, however, and he still supplied Predecessor with lumber through Plaintiff LLC.
Predecessor’s management sold the company’s assets to Defendant in August 2011. At that time, Plaintiff agreed to release his membership interest to Subsidiary. Defendant acquired all of Predecessor’s assets and assumed $1,162,000 in liabilities—including $300,000 owed to Plaintiff. Defendant continued in the business of truss design and manufacture in the same location, with some of the same work force and customers. However, testimony demonstrated that the ownership structure, operation and management had changed.
Plaintiff sued Predecessor for breach of contract, alleging that he received only $147,000 of his agreed-upon total compensation of $240,000. Plaintiff sought to recover the remaining $93,000 along with treble damages. Plaintiff also alleged that Defendant was liable under the theory of successor liability because Defendant’s operation was a “mere continuation” of Predecessor’s enterprise.
The trial court declined to hold Defendant liable for nonpayment of wages or breach of contract by Predecessor, finding that (1) there was no evidence that the transaction was for the purpose of avoiding liability to Plaintiff; (2) Defendant provided Predecessor adequate consideration in the asset transfer; and (3) the overlap in management, control and ownership between Predecessor and Defendant was not alone enough to find that there was a “mere continuation.” Plaintiff appealed, arguing that the trial court erred by examining the purpose of the transaction and the adequacy of consideration in its “mere continuation” analysis.
The court observed that in general, a corporation which acquires the assets of another corporation is not liable for the debts and liabilities of the predecessor corporation. Maryland law recognizes four exceptions to the general rule: (1) when there is an expressed or implied assumption of liability; (2) when the transaction amounts to a consolidation or merger; (3) the purchasing corporation is a mere continuation of the selling corporation; or (4) the transaction is entered into fraudulently to escape liability for debts.
The court explained that the “mere continuation” exception permits recovery against the successor corporation where the successor is essentially the same corporate entity as the predecessor. Furthermore, the exception is designed to prevent transactions where the specific purpose “is to place those assets out of the reach of predecessor’s creditors.” The exception had been addressed in only three previous opinions by Maryland appellate courts: Baltimore Luggage Co. v. Holtzman
, 80 Md. App. 282 (1989), Nissen Corp. v. Miller
, 323 Md. 613, 617 (1991), and Academy of IRM v. LVI Envtl. Servs. Inc.
, 344 Md. 434 (1997).
In Baltimore Luggage
, the court explained that “the underlying theory of the [‘mere continuation’ exception] is that, if a corporation goes through a mere change in form without a significant change in substance, it should not be allowed to escape liability.” The court instructed that the “indicia of continuation” are “common officers, directors, and stockholders” and “only one corporation in existence after the completion of the sale of assets.” The court added that “[o]ther factors, such as continuation of the seller’s business practices and policies and the sufficiency of consideration running to the seller corporation” may also be considered in determining whether the exception should be applied.
, the court drew a distinction between the “mere continuation” exception and “continuity of the enterprise” theories, the latter of which is not recognized in Maryland. In drawing the distinction, the court observed that “[t]he mere continuation . . . exception applies where there is a continuation of directors and management, shareholder interest and, in some cases, inadequate consideration.”
In Academy of IRM
, the court also considered an additional relevant factor to the “mere continuation” exception: the purpose of the asset sale. The court stated that “successor liability does not lie” where the transaction is not fraudulent as to unsecured creditors. The court also cited Jackson v. Diamond T. Trucking Co.
, 241 A.2d 471, 477 (N.J. 1968),* which held that when deciding when to apply the “mere continuation” exception, “[m]any facts and policy factors must be weighed in the balance, most importantly, the policy protecting corporate creditors must be weighed against the equally important policy respecting separate corporate entities.”
The court reasoned that the combined effect of Baltimore Luggage
, and Academy of IRM
is that five factors may be considered in determining whether to apply the “mere continuation” exception in Maryland: “(1) any change in ownership and management, (2) the continued existence of the selling corporation, (3) the adequacy of consideration, (4) the transfer of any ‘instrumental’ employees from the predecessor to the successor, and (5) the purpose of the asset sale.” Thus, the court concluded that the trial court did not err in examining the adequacy of consideration and purpose of the asset sale in its analysis of the “mere continuation” exception.
The court then reviewed the trial court’s application of the factors to the case before it. While there was substantial overlap in management, control, and ownership, this alone was not determinative, because the transaction involved more than simply a single entity “chang[ing] hats.” Indeed, the ownership and management had changed following the asset sale. Furthermore, the evidence showed that Predecessor’s decision to sell its assets was not for the purpose of placing its assets beyond Plaintiff’s reach, but rather it was to salvage a failing business. Defendant also agreed to assume nearly $1.2 million of Predecessor’s liabilities—including its $300,000 trade debt to Plaintiff—which constituted adequate consideration for the transfer of assets. Finally, the underlying purpose of protecting creditor rights would not be served if Defendant were held liable for Predecessor’s obligations in this case: for example, Plaintiff himself was protected as a creditor when Defendant assumed Predecessor’s liabilities rather than allowing Predecessor to file for bankruptcy.
The full opinion is available in PDF.
*Editorial note: the court mistakenly identifies Jackson as "decision of the Supreme Court of Rhode Island;" however, Jackson was in fact decided by the Superior Court of New Jersey Law Division. See 241 A.2d 471, 100 N.J. Super. 186. In a decision called H.J. Baker & Bros., Inc. v. Orgonics, Inc., 554 A.2d 196 (R.I. 1989), the Supreme Court of Rhode Island did adopt the five factors provided in Jackson.