: James K. Bredar
: In a claim alleging breach of fiduciary duty under section 36(b) of the Investment Company Act of 1940, with respect to the receipt of compensation for services by the investment advisor of a registered investment company, a pleading of comparable fund fees is not required in order to state a viable claim.
Facts: Plaintiffs were investors in mutual funds and brought suit on behalf of those funds against Defendant, the investment advisor to the funds. Plaintiffs alleged Defendant violated its fiduciary duties with respect to the fees paid by the funds to the Defendant. Plaintiffs alleged, among other matters, that (i) the fees received by Defendant were so disproportionately large that they bore no relationship to the value of the services provided and were not the product of arm’s-length negotiation, (ii) Defendant delegated to subadvisors substantially all of Defendant’s responsibilities while retaining over half of the fees received from the funds and (iii) most of the money received by Defendant as fees represented pure profits and not compensation for services rendered.
Plaintiffs made further allegations as to each of the funds growth in assets under management and compared the responsibilities of Defendant and the subadvisors under the applicable management agreements. Each of the funds is required to pay Defendant an annual fee (the “Advisor Fee”) calculated as a percentage of the applicable assets under management. The Defendant pays the subadvisor an annual fee that, Plaintiffs alleged, equals approximately 50% of the Advisor Fee “for the nearly identical services” required of Defendant.
While recognizing the affiliations between the Defendant and subadvisors, Plaintiffs alleged that the subadvisors had an incentive to negotiate the highest possible fees and that these negotiations were therefore conducted at arm’s length. Consequently, Plaintiffs alleged that the fees negotiated by the subadvisors were indicative of a reasonable fee for services required under the Defendant’s management agreements with the funds. Plaintiffs made a series of additional allegations regarding Defendant’s lack of care in negotiation of advisory fees and the fund’s boards.
: Section 36(b) of the Investment Company Act of 1940 provides that an investment advisor of a registered investment company has a fiduciary duty with respect to “receipt of compensation for services.” Security holders are permitted to sue the investment advisor, on behalf of the funds, for breach of this duty and may recover damages resulting from such breach up to the amount of compensation received by the advisor. The Supreme Court has provided that to face liability under Section 36(b), “an investment adviser must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not” have been negotiated at arm’s length. Jones v. Harris Assocs. L.P., 559 U.S. 335 (2010)
. In analyzing whether an investment advisor has breached its duty, the Supreme Court has: (i) noted that all relevant circumstances must be considered; (ii) declined to implement a “categorical rule regarding the comparisons of the fees charged”; and, (iii) explained that “the appropriate measure of deference to a board’s judgment in approving an investment advisor’s compensation varies according to the circumstances.”
Defendant moved to dismiss for failure to state a claim on the basis of three arguments. First, Defendant argued that the complaint did not include any facts about fees paid by comparable funds. The Court believed that this argument misstated precedent and explained that, at least for purposes of the Fourth Circuit, Jones
does not require pleading of comparable fund fees to state a viable claim.
Second, Defendant argued that the complaint improperly challenged the “manager of managers” structure used by the funds, which is widely used by other funds and approved by the SEC. The Court noted that the structure is not being attacked. Rather, Plaintiffs challenged the amount of fees.
Third, Defendant argued that Plaintiffs did not sufficiently offer allegations to “overturn the Independent Trustees’ business judgment” in their approval of the management agreements. The Court explained that Plaintiff’s allegations regarding what “entities are actually performing” the services allow an inference either that a business judgment to approve the compensation was not one based on full information or that it was not reached through arm’s length negotiation. Accordingly, the Court denied Defendant’s motion to dismiss for failure to state a claim.
The opinion is available in PDF.
Filed: August 19, 2016
Opinion by: J. McDonald
Holding: A Virginia-based law firm and its managing partner were not covered by the attorney exemption to the Maryland Credit Services Business Act (“MCSBA”), which regulates the “credit services business,” because they regularly and continually engaged in the credit services business by consulting with several hundred Maryland homeowners confronted with the possibility of foreclosure and entered into paid agreements with 57 of them to renegotiate their mortgage loans over the course of nine months.
Facts: A small Virginia law firm accepted hundreds of referrals of Maryland homeowners from a Virginia-based consulting business that advertised in Spanish-language media and accepted fees to analyze a homeowner’s mortgage status. The law firm and its sole shareholder and managing partner, licensed in Virginia and D.C., but not Maryland, employed in succession two Maryland attorneys to meet with Maryland clients. The first of these Maryland attorneys (the "Maryland attorney") estimated that the majority of his workload was related to the Maryland homeowners by the time he left the firm. When the Maryland attorneys were unavailable, the managing partner or another D.C. attorney met with the homeowners.
The homeowners, mostly native Spanish-speakers who spoke little or no English, entered into retainer agreements with the law firm, paying up to $7,500 up front in exchange for negotiations with the lender to modify their loan, foreclosure defense, and possible litigation. The law firm made little effort to actually renegotiate the loans and did not obtain a loan modification for any of the homeowners. One couple, who paid fees to the consulting company and the law firm and eventually lost their home in a foreclosure, lodged a Complaint with Commissioner of Financial Regulation. The Commissioner investigated and issued a cease and desist order forcing the law firm to terminate its agreements with Maryland homeowners. The Maryland attorney settled but the law firm and its managing partner requested a contested hearing. The Commissioner referred the matter to an Administrative Law Judge ("ALJ"), who issued a proposed decision concluding that they had willfully violated the statute and recommending a final cease and desist order and monetary penalties. The Deputy Commissioner, the final decision-maker, adopted the ALJ’s holdings. The law firm and its managing partner requested an exceptions hearing. The Deputy Commissioner then issued a final order finding that they violated the statute and that the agreements were void, issued a cease and desist, and held them jointly and severally liable for a civil monetary penalty of $114,000 and $720,600 in treble damages. The law firm and its managing partner appealed in the Circuit Court for Baltimore County, which reversed the Commissioner’s decision, holding that their activities did not constitute “credit services business.” The Court of Special Appeals affirmed. The question on appeal was whether the law firm and its managing partner conducted “credit services business” under the MCSBA, and if so, whether the attorney exemption applied. If they did conduct such services and the exemption did not apply, then they should have obtained a license and complied with the statute's other various requirements. It is undisputed that they did not do so.
Analysis: The MCSBA applies to any person (including legal or commercial entities) who, with respect to the extension of credit by others, sells, provides, or performs (or represents that it will do so) in exchange for consideration the enumerated services, which include obtaining a credit extension for a consumer and providing advice or assistance regarding obtaining a credit extension or improving his or her credit record. CL § 14-1901. A credit extension is defined as “the right to defer a payment of debt, or to incur debt and defer its payment, offered or granted primarily for personal, family or household purposes.” CL § 14-1901.
Providing these services qualifies one as a “credit services business.” Ten categories of individuals are exempted from the definition of “credit services business.” One category includes individuals who meet the following three conditions: is licensed as an attorney in Maryland, renders services within the course and scope of legal practice, and does not engage in the credit services business on a regular and continuing basis. Here, the law firm and its managing partner accepted thousands in fees in exchange for renegotiating the terms of mortgage loans, which means seeking a modification of principal or interest or repayment term, and inevitably means seeking some form of deferral. Thus, renegotiating the terms of a distressed home mortgage loan means obtaining a credit extension for personal, family or household purposes, as defined under CL § 14-1901(e)(1),(f). As such, the law firm and its managing partner met the general definition under the statute. An analysis of the legislative history of the statute confirms that it is intended to provide broad protection to the consumers of credit services, and is not limited to merely credit repair agencies or lenders, as the law firm and its managing partner had argued. As to the attorney exemption, the law firm and its managing partner did offer services on a “regular and continuing basis.” Though this term is undefined, the consultations and agreements were a very significant part of the law firm’s business and accounted for most of the work of its Maryland-licensed attorney by the time he left the law firm. The Court found hundreds of consultations and 57 agreements over the course of nine months to be significant. Notably, the Court pointed out that the ALJ had suggested that in less stark cases, there may be situations where “there is a significant question at what point an attorney who frequently provides such services has crossed the line into providing ‘regular and continuing’ credit services.” Nonetheless, the Court noted that this case sharply contrasts with that of an attorney providing occasional services to an individual client, for example. Ultimately, the mere fact that one is an attorney does not automatically qualify one for the exemption. The Court affirmed the Commissioner’s holding that the MCSBA applied to the law firm and its managing partner's activities and that the attorney exemption did not apply because they conducted their activities on a regular and continuing basis. Because the issue of whether their violations were or were not willful was not argued on appeal, the Court remanded to the Circuit Court on that issue.
The full opinion is available in PDF.
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.